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.

INVESTOPEDIA EXPLAINS '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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RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What are some real life examples of absolute advantage?

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  4. 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 >>
  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. 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 >>
  7. 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 >>
  8. 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 >>
  9. 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 >>
  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 >>
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