Comparative Advantage


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.


Loading the player...

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.

  1. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  2. David Ricardo

    A classical economist known for his Iron Law of Wages, labor ...
  3. Gap Analysis

    1) The process through which a company compares its actual performance ...
  4. Non-Competition Agreement

    A legal agreement in which one party is restricted from working ...
  5. Eat Your Own Dog Food

    A colloquialism that describes a company using its own products ...
  6. Eating Someone's Lunch

    The act of an aggressive competition that results in one company ...
Related Articles
  1. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  2. Economics

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
  3. Economics

    The 4 Countries That Produce the Most Food

    Learn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
  4. Economics

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  5. Investing Basics

    What Does In Specie Mean?

    In specie describes the distribution of an asset in its physical form instead of cash.
  6. Economics

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  7. Fundamental Analysis

    Emerging Markets: Analyzing Colombia's GDP

    With a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy.
  8. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  9. Economics

    Is the U.S. Economy Ready for Liftoff?

    The Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
  10. Economics

    Oil Is Cheaper Than Bread In Venezuela...The Country Is In Chaos

    Venezuela is floundering, and the story has more to do with just the falling price of oil.
  1. How can a nation adopt an export policy based on the economies of scope?

    A nation as a whole can adopt an export policy based on the economies of scope by focusing production on goods and services ... Read Full Answer >>
  2. How do "factor endowments" impact a country's comparative advantage?

    Factor endowments impact a country's comparative advantage by affecting the opportunity cost of specializing in producing ... Read Full Answer >>
  3. 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 >>
  4. What are some real life examples of absolute advantage?

    Absolute advantage is fairly simple to identify in theory, but it can be difficult to tease out in practice. Even with the ... Read Full Answer >>
  5. How can a company or entity maintain an absolute advantage?

    A company or entity can maintain an absolute advantage by consistently maintaining a smaller quantity of inputs to produce ... Read Full Answer >>
  6. How can a company or entity challenge the absolute advantage of another company?

    A company or entity can challenge the absolute advantage of another company or entity by requiring a smaller number of inputs ... Read Full Answer >>
  7. What are the implications of comparative advantage as it relates to international ...

    Comparative advantage was popularized by the 19th century economist David Ricardo. Countries can collectively benefit from ... Read Full Answer >>
  8. Is it possible for a country to have a comparative advantage in everything?

    In international trade, it is not possible for a country to have a comparative advantage in the production of all goods. ... Read Full Answer >>
  9. How does globalization impact comparative advantage?

    Globalization has made the concept of comparative advantage more relevant than ever. Comparative advantage is defined as ... Read Full Answer >>
  10. What is the Ricardian vice?

    The Ricardian vice refers to abstract model-building and mathematical formulas with unrealistic assumptions. In simpler terms, ... Read Full Answer >>
  11. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!