Comparative advantage
Comparative advantage is a term economists use, especially in international trade. A country has a comparative advantage when it can make goods or services at a lower opportunity cost than another country.[1]
Ricardo's example
For example, during the Industrial Revolution, England and Portugal both made wine and cloth.
| Country \ Produce | Cloth | Wine |
|---|---|---|
| England | 100 | 120 |
| Portugal | 90 | 80 |
Suppose the number shows the number of hours required to create one piece of cloth or one crate of wine. In 100 hours, England can either make 1 unit of cloth or 5/6 units of wine. Meanwhile in 90 hours Portugal can make 1 unit of cloth or 9/8 units of wine. Portugal has an absolute advantage in both. However England's opportunity cost of 5/6 is lower than Portugal's OC 9/8. Hence England has a comparative advantage in cloth-making.
David Ricardo predicted that Portugal would stop making cloths and England would stop making wine. That did happen.[2]
Theory predicts that even if one country can produce all good more efficiently than another, trade will make both better off if they specialize in the goods they have a comparative advantage in.
This theory also says that protectionism (raising tariffs or blocking trade from other countries) does not work in the long run.[2]
Related pages
References
Other websites
- What Is Comparative Advantage? | The Street
- Comparative advantage and when to blow up your island
- Ricardo's Difficult Idea, Paul Krugman's 1996 exploration of why non-economists don't understand the idea of comparative advantage
- What is comparative advantage? | Investopedia
