Comparative Advantage

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DEFINITION of 'Comparative Advantage'

The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

BREAKING DOWN 'Comparative Advantage'

Having a comparative advantage - or disadvantage - can shape a company's entire focus. For example, if a cruise company found that it had a comparative advantage over a similar company, due ito its closer proximity to a port, it might encourage the latter to focus on other, more productive, aspects of the business.

It is important to note that a comparative advantage is not the same as an absolute advantage. The latter implies that one is the best at something, while the former relates more to the costs of the particular endeavor.

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  4. How does comparative advantage influence the balance of payments?

    Comparative advantage influences the balance of payments through its effect on the current account. The balance of payments ... Read Full Answer >>
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