comparative advantage

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Comparative advantage

Theory suggesting that specialization by countries can increase worldwide production.

Comparative Advantage

The ability of an individual, company, or economy to conduct an activity better than another for some fixed, almost unchangeable reason. Comparative advantage is important in making decisions such as what products one should make or sell; if a company is unable to make a product as well as another and that is unlikely to change, the company might be well advised to make a different product. For example, a lumber company in Oregon has a comparative advantage to a lumber company in Arizona because there are simply more trees in Oregon. This makes it unlikely that the company in Arizona will be able to fill orders as well or as quickly as the company in Oregon. For this reason, the Arizona company's management might consider investing in mining instead of lumber.

comparative advantage

see INTERNATIONAL TRADE.
Comparative advantageclick for a larger image
Fig. 24 Comparative advantage. The physical output of X and Y from a given factor input, and the opportunity cost of X in terms of Y. The opportunity cost of producing one more unit of X is 1Y in country A, and 2/3 Y in country B. The opportunity cost of producing one more unit of Y is 1X in country A, and 11/2X in country B.

comparative advantage

the advantage possessed by a country engaged in INTERNATIONAL TRADE if it can produce a given good at a lower resource input cost than other countries. Also called comparative cost principle. This proposition is illustrated in Fig. 24 with respect to two countries (A and B) and two GOODS (X and Y). The same given resource input in both countries enables them to produce either the quantity of Good X or the quantity of Good Y indicated in Fig. 24. It can be seen that Country B is absolutely more efficient than Country A since it can produce more of both goods. However, it is comparative advantage not ABSOLUTE ADVANTAGE that determines whether trade is beneficial or not. Comparative advantage arises because the marginal OPPORTUNITY COSTS of one good in terms of the other differ as between countries (see HECKSCHER-OHLIN FACTOR PROPORTIONS THEORY).

It can be seen that Country B has a comparative advantage in the production of Good X for it is able to produce it at a lower factor cost than Country A; the resource or opportunity cost of producing an additional unit of X is only 2/3 Y in Country B, whereas in Country A it is 1Y .

Country A has a comparative advantage in the production of Good Y for it is able to produce it at lower factor cost than Country B; the resource or opportunity cost of producing an additional unit of Y is only 1X, whereas in Country B it is 11/2X.

Both countries, therefore, stand to increase their economic welfare if they specialize (see SPECIALIZATION) in the production of the good in which they have a comparative advantage (see GAINS FROM TRADE for an illustration of this important proposition). The extent to which each will benefit from trade will depend upon the real terms of trade at which they agree to exchange X and Y.

A basic assumption of this presentation is that factor endowments, and hence comparative advantages, are ‘fixed’. Dynamically, however, comparative advantage may well change. It may do so in response to a number of influences, including:

  1. the initiation by a country's government of structural programmes leading to resource redeployment. For example, a country that seemingly has a comparative advantage in the supply of primary products such as cotton and wheat may nevertheless abandon or de-emphasize it in favour of a drive towards industrialization and the establishment of comparative advantage in higher value-added manufactured goods;
  2. international capital movements and technology transfer, and relocation of production by MULTINATIONAL COMPANIES. For example, Malaysia developed a comparative advantage in the production of natural rubber only after UK entrepreneurs established and invested in rubber-tree plantations there. See COMPETITIVE ADVANTAGE (OF COUNTRIES).
References in classic literature ?
I left that enquiry and turned away to consider whether justice is virtue and wisdom or evil and folly; and when there arose a further question about the comparative advantages of justice and injustice, I could not refrain from passing on to that.
Russia's Comparative Advantages in Foreign Trade: Forecasting Potential Dynamics and Identifying Stimulation Measures
It is expected that these developments, in conjunction with the government's outward-looking policies, will bring about changes to the country's comparative advantages.
Part of it I understand as it is equally universal marketing principles that apply, but the major reason for the price fluctuations, is in my mind, a lack of the ability to fully appreciate the comparative advantages of local producers to capture a local market.
He called for establishing more joint ventures between private sector's organizations to take advantage of the comparative advantages and incentives available to increase the economic values to be added to our natural resources.
Though it is easy to recognize how the law of comparative advantage applies when one considers the division of labor between say, a coffee producer and a corn producer, it is not immediately clear how comparative advantages would operate and a division of labor would occur between someone who produces corn and the speculator who buys it in advance at an agreed upon future price in hopes of selling it later at a higher price (or even any speculator who would instead buy the corn on the spot market in the hope of selling it later at a higher price).
It is clear from the t-values of India that it is the only country which has a positive impact of WTO on both competitive and comparative advantages in agricultural and merchandise trade.
They are aligned with the Bank's comparative advantages, the government's development agenda as outlined in NSDP II, and the available resources.
They are aligned with the Banks comparative advantages, the governments development agenda as outlined in NSDP II, and the available resources.
To achieve that, countries that have unnaturally retained comparative advantages in food production, because of subsidies and protectionist measures, must abolish those to allow for the natural shift to occur from their agricultural sectors to ones that are more efficient, wherever those are.
The comparative advantages of Cyprus as a business and investment destination were presented on Friday evening by President Nicos Anastasiades during the business forum "Invest in Cyprus" organised by Capital Link in New York.
Self-sufficiency, comparative advantages, and agricultural trade: A policy analysis matrix for Chinese agriculture.

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