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.

Hours of work necessary to produce one unit

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

• Competitive advantage