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Comparative Advantage

Definition

Comparative advantage is an economic principle that states a country should specialize in producing and exporting goods it can produce more efficiently (at a lower opportunity cost) than other countries, and import goods that other countries can produce more efficiently.

Analogy

Imagine you're really good at making sandwiches but not so great at baking cookies. Your friend, on the other hand, bakes amazing cookies but struggles with sandwich-making. You both decide to focus on what you do best - you make sandwiches for both of you, and your friend bakes cookies. This way, you both get the best sandwiches and cookies with less effort - that's comparative advantage!

Related terms

Opportunity Cost: This is what must be given up to obtain something else - like giving up time you could spend baking cookies to make better sandwiches.

Specialization: In economics, this refers to focusing production on specific goods or services for efficiency - just like focusing on making sandwiches because you're good at it.

Trade Balance: This is the difference between a country's exports and imports - similar to how many sandwiches you 'export' to your friend versus how many cookies you 'import'.