Light

Comparative Advantage

Definition

Comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost compared to other countries. It is the basis for international trade and specialization.

Analogy

Imagine you and your friend both have chores to do - cleaning your room and washing dishes. If you are faster at cleaning your room but slower at washing dishes, it would be more efficient for you to focus on cleaning while your friend focuses on dishwashing. This way, each of you specializes in what you're best at, just like countries with comparative advantage specialize in producing what they're most efficient in.

Related terms

Allocative Efficiency: Allocative efficiency refers to the optimal allocation of resources in a way that maximizes societal welfare. It occurs when resources are allocated in such a way that the marginal benefit equals the marginal cost.

Productive Efficiency: Productive efficiency refers to producing goods and services at the lowest possible cost. It occurs when an economy is producing on its production possibility frontier, utilizing all available resources efficiently.

Opportunity Cost: Opportunity cost is the value of the next best alternative foregone when making a decision. It represents what must be given up in order to obtain something else.