Comparative Advantage

The concept of comparative advantage is usually attributed to the book "On the Principles of Political Economy and Taxation," written by David Ricardo in 1917. He coined the term when comparing production in England and Portugal. In essence, comparative advantage refers to someone or something to produce a good/service for a lower opportunity cost than another. It encourages people to specialize in what provides the lowest opportunity cost.



Example 1, Comparative Advantage In Practice:
-- Suppose Company ABC and Company XYZ each produce cars and airplanes, and the principle of ceteris paribus is applicable.
-- Company ABC produces cars and airplanes that are more structurally sound and more popular among consumers than Company XYZ's.
-- That means Company ABC has an absolute advantage.
-- However, it is not in Company ABC's interests to establish a monopoly and produce everything itself. It's actually cheaper for Company XYZ to produce airplanes.
-- Therefore, it benefits both companies if Company ABC specializes in cars instead of airplanes and if Company XYZ specializes in airplanes instead of cars. They can trade with each other and it's more beneficial.



Example 2, Comparative Advantage With Numbers: