Comparative advantage

Comparative advantage is the ability of one person, company, or country to produce one good using relatively fewer resources than another. 

The concept of comparative advantage is one of the basic foundations of international trade. It assumes as decisive the relative costs of production and not the absolute ones. In other words, countries produce goods that represent a lower relative cost compared to the rest of the world.

The comparative advantage model was developed by economist David Ricardo as a response to and improvement of Adam Smith’s theory of absolute advantage . According to Ricardo’s point of view in the 19th century, countries specialize in the production and export of those goods that they can manufacture at relatively lower costs.

Theory of comparative advantage

Each country in question will specialize in what is most efficient. At the same time, it will import the rest of the products in which they are more ineffective in terms of production. Although a country does not have an absolute advantage in producing any good, it will be able to specialize in those goods in which it finds a greater comparative advantage and finally be able to participate in the international market. In this sense, it can enhance its foreign trade .

It is then the basic idea that countries choose to specialize in order to trade in activities where they have a certain advantage. That is, instead of producing what they do best in an absolute way, they produce what they do best in a relative way. Therefore, the difference with the theory of absolute advantage lies in the fact that it does not produce what costs the country the least, but what has the lowest comparative costs.

According to the theory of comparative advantage , said advantage will come from the opportunity cost that it faces in the production of each good. In other words, and applying a simple example, to produce bananas you must sacrifice less leaving aside apple production. Formally, the country produces a good and exports it because it has a lower relative cost than that of another country since it dispenses with the production of less quantity of good.

Following this pattern of conduct trade takes place. Consequently, there are importing and exporting countries that operate under the idea of efficiency . A very simple scheme but one that quickly became one of the fundamental pillars in the study of international trade

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