What is a Comparative Advantage?

Malcolm Tatum

Comparative advantage is the ability of one entity to produce goods or services with similar quality but at a lower unit price than other competing entities. In most cases, the principle of comparative advantage is utilized to compare the output in production between two countries that produce the same type of good or service. Sometimes referred to as an absolute advantage, the process will address several aspects of the production process.

Businessman with a briefcase
Businessman with a briefcase

Comparative advantages, in order to be accurate, must define the perimeter of factors that will be under consideration. Opportunity cost is one common element that is used in just about every example of comparative advantage. Essentially, opportunity costs are the economic costs involved in using a resource for a specific activity. Within this context, the comparative advantage will address what consequences, if any, the entity will experience by choosing to use resources to produce a given product rather than use the resources in a different application.

Along with addressing the opportunity cost, a comparative advantage will also look at the overall production of the good or service within a given time frame. This helps to identify any incidences where outside factors within each production environment seem to help or hinder the rate of production consistently. If there are factors such as political unrest or recurring weather conditions that influence the rate of production, these will be noted.

Finally, the comparative advantage just about always addresses the bottom line price per unit produced. This figure, while not the single most important element in a comparative advantage, does have a huge impact. The ability to produce goods at a low cost often means the ability to sell the units at a competitive price but still realize more profits from the activity. Efficiency in production is often the factor that most greatly influences the production cost per unit, but the cost and availability of raw materials will also play a significant role in determining the price of manufacturing each unit for sale.

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Discussion Comments


@burcidi-- My instructor said that comparative advantage is a type of competitive advantage.

Apparently, comparative advantage and differential advantage are considered to be competitive advantage. The former is about producing goods at a lower cost and getting more people to buy it. The latter is about producing goods that are unique and different than others.

So maybe we should talk about comparative vs differential advantage rather than comparative vs competitive advantage.


@burcidi-- I'm not an expert on economy but I think that a business has competitive advantage in a market when it can produce a good cheaper than anyone else and make the most profit.

Comparative advantage just means that a business is producing a good more efficiently than others. So a business can have a comparative advantage in a good but not competitive advantage.

Does this make sense?


I have homework on this topic and I need to understand the difference between comparative advantage vs competitive advantage. Does anyone know the difference?

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