Comparative Advantage

Comparative Advantage is an ability of a manufacturer (country, region, company, individual, etc.) to produce a certain good with the help of the alternative expenses that are less than the other manufacturer uses. The outstanding British economist David Ricardo launched this term in 1817. It’s the crucial thing for any kind of the production:

  • If one manufacturer can produce 5 computers and 10 printers per particular time unit, the alternative cost of producing of 1 computer is equal to 2 printers.
  • If another manufacturer produces 2 computers and 6 printers in one hour, the alternative cost of producing of 1 computer is equal to 3 printers.

It means that the first manufacturer has a comparative advantage in producing computers – for the production of the extra computer, the first manufacturer needs to sacrifice the production of only two instead of three printers (as the second manufacturer would do).

The second manufacturer has a comparative advantage in the production of printers – for the production of one extra printer, it is necessary to sacrifice the time required for the production of only 1/3 of the computer compared to the 1/2 computer of the first manufacturer.

The theory by David Ricardo clearly shows why countries get involved in international trade despite the fact that one country’s workers are more efficient at producing every single good than workers from other countries.