# Comparative Advantage

In economics, the law of comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. Even if one country is more efficient in the production of all goods (absolute advantage in all goods) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies.

For example, if, using machinery, a worker in one country can produce both shoes and shirts at 6 per hour, and a worker in a country with less machinery can produce either 2 shoes or 4 shirts in an hour, each country can gain from trade because their internal trade-offs between shoes and shirts are different. The less-efficient country has a comparative advantage in shirts, so it finds it more efficient to produce shirts and trade them to the more-efficient country for shoes. Without trade, its opportunity cost per shoe was 2 shirts; by trading, its cost per shoe can reduce to as low as 1 shirt depending on how much trade occurs (since the more-efficient country has a 1:1 trade-off). The more-efficient country has a comparative advantage in shoes, so it can gain in efficiency by moving some workers from shirt-production to shoe-production and trading some shoes for shirts. Without trade, its cost to make a shirt was 1 shoe; by trading, its cost per shirt can go as low as 1/2 shoe depending on how much trade occurs.

Another example: Say you have John who makes \$300 an hour and he hires a maid who works for \$25 an hour. It takes John 1 hour to clean his house compared to his maid who takes 8 hours to clean his house. John has an absolute advantage over his maid but the maid has a comparative advantage. This is because if John cleans his house by himself, he loses \$300. If he hires the maid, he makes a profit of \$100.

The net benefits to each country are called the gains from trade.

### Other articles related to "comparative advantage, advantage, comparative":

Modern Economics - Microeconomics - Specialization
... According to theory, this may give a comparative advantage in production of goods that make more intensive use of the relatively more abundant, thus relatively cheaper ... Even if one region has an absolute advantage as to the ratio of its outputs to inputs in every type of output, it may still specialize in the output in which it has a comparative ... outputs and productive inputs select an allocation of factor inputs by comparative advantage, so that (relatively) low-cost inputs go to producing low-c ...
Ricardian Economics - Comparative Advantage
... According to the Washington Council on International Trade, comparative advantage is the ability to produce a good at a lower cost, relative to other goods, compared ... of Economics, Ricardo states that comparative advantage is a specialization technique used to create more efficient production (52) and describes opportunity cost ... perfect competition and undistorted markets, countries tend to export goods in which they have a comparative advantage ("Comparative Advantage") ...
Comparative Advantage - Considerations - Free Mobility of Capital in A Globalized World
... of Maryland, have voiced concern over the applicability of Ricardo's theory of comparative advantage in light of a perceived increase in the mobility of capital "Internati ... from one good to multiple goods, the absolute may turn to a comparative advantage ... country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial ...
Export-led Growth - Limitations
... diversity as economies pursue their comparative advantage, which makes the economies potentially unstable if demand for their specialization falls this is something which ... This is true of many economies aiming to exploit their comparative advantage in primary commodities as they have a long term trend of declining prices, noted in the Singer-Prebisch thesis though there are ... Also to exploit a potential comparative advantage requires a significant amount of investment which governments can only supply a limited amount of ...
Free Trade Debate - Criticisms of Free Trade - Economic Arguments Against Free Trade - Capital Mobility and Comparative Advantage
... Some descriptions of comparative advantage rest on a necessary condition of capital immobility ... If financial or labor resources can move between countries, then comparative advantage erodes, and absolute advantage dominates ... For instance, the Heckscher-Ohlin model derives comparative advantage from differing relative abundances of capital and labour between countries ...

### Famous quotes containing the words advantage and/or comparative:

The advantage in education is always with those children who slip up into life without being objects of notice.
Ralph Waldo Emerson (1803–1882)

That hour in the life of a man when first the help of humanity fails him, and he learns that in his obscurity and indigence humanity holds him a dog and no man: that hour is a hard one, but not the hardest. There is still another hour which follows, when he learns that in his infinite comparative minuteness and abjectness, the gods do likewise despise him, and own him not of their clan.
Herman Melville (1819–1891)