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Comparative Advantage Definition

https://www.investopedia.com/terms/c/comparativeadvantage.asp

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Comparative Advantage Definition

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Microeconomics: Comparative Advantage

Microeconomics: Comparative Advantage

The law of comparative advantage was first mentioned in 1817 by English economist David Ricardo.

A company has a comparative advantage when it is able to provide a good or service at a lower opportunity cost than others, helping it sell the same product at a lower cost, resulting in better margins.

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Opportunity Cost

An opportunity cost is the potential ‘alternative’ or benefit that is forfeited when one chooses a particular option.

The other, foregone option, if it is lower than other companies, is the key factor in this trade-off.

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Skills: Diversity And Specialization

Comparative advantage is also measured by the salary yardstick, and how much a person’s time, skills and core skill sets are worth.

Example: Michael Jordan is a skilled basketball player, and is very tall. If he wants, he could paint his own house by himself and do it quickly due to his height. But as he is also a skilled sportsperson, he could earn much more in that time, and probably hire someone else to paint his house, even if the hired painter (who has a comparative advantage due to his specialization of painting houses) takes more time to do it.

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Comparative Advantage Vs. Absolute Advantage

  • Comparative advantage is only an advantage of a lower opportunity cost, and does not factor in volume or quality.
  • Absolute advantage is the pure ability of a company to produce better goods or services (in quantity or quality) than the competition.

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Comparative Advantage vs. Competitive Advantage

When a company is at a better position to provide strong value to the customer, it is said to be at a competitive advantage.

Example: A cable TV operator offers low cost wifi internet services at great speeds and no downtime, which isn’t offered by the competition in that area. The decades of experience in cable TV makes for a competitive advantage.

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Comparative Advantage in International Trade

Certain countries have unique strengths, local resources and talent that can be a comparative advantage to them, and make products at a cheaper cost than other countries. If they indulge in protectionism, the end result is higher costs and inefficiency for all.

Example: China has a low opportunity cost to produce simple consumer goods due to the cheap labour it employs, and countries like France and America do not need to focus on simple goods, so are able to make sophisticated products like rockets, cars and ships.

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Comparative Advantage: Rules, Regulations and Restrictions

Governments around the world impose rules, regulations and restrictions like:

  1. Tariffs
  2. Selective trade agreements.
  3. Lobbying and rent-seeking to protect a country's interests.
  4. Tax breaks and special deals
  5. Sanctions

These practices ensure that comparative advantage does not benefit all like it should, and stifles equality and growth of small players.

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SIMILAR ARTICLES & IDEAS:

Marginal Benefit vs. Marginal Cost

Marginal Benefit vs. Marginal Cost

Marginal benefit and marginal cost are two measures of how the cost or value of a product changes.

  • The marginal benefit is a measurement from the consumer

Marginal Benefit

A marginal benefit change in a consumer's advantage if they use an additional unit of a good or service.

A marginal benefit usually declines as consumption increases. For example, the consumer may buy one ring for $100, but only willing to buy another if the second ring is $50. The consumer's marginal benefit reduces from $100 to $50 from the first to the second good.

Marginal Cost

Producers consider marginal cost, which is the small but measurable change in the expense to the business if it produces one additional unit.

In producing a product, efficiency in productivity can result in making more products in the same amount of time. The cost of raw materials may also go down if it is purchased in bulk, therefore, decreasing the marginal cost.

Black Friday has two relevant meanings

Black Friday has two relevant meanings
  • In history, Black Friday was a stock market disaster that happened on September 24, 1869, when, after a period of uncontrolled speculation, the price of gold crashed, and th...

Black Friday and retail spending

  • Retailers may spend an entire year planning their Black Friday sales. They use this event as their chance to offer special prices on overstock inventory and discounts on seasonal items, such as typical holiday gifts.
  • Retailers also offer significant discounts on top-selling brands of TVs, smart devices, and other electronics, tempting customers in the hope that, once inside, they will purchase higher-margin goods.
  • Consumers often shop on Black Friday for the hottest trending items, which can lead to stampedes and violence in the absence of adequate security.

"In the Black"

There is a theory stating that, when it comes to "Black Friday", the term "black" refers to being profitable, which comes from the old bookkeeping practice of recording profits in black ink and losses in red ink.

Retail businesses should be able to sell enough on this Friday (and the ensuing weekend) to put themselves "in the black” for the rest of the year.

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A financial crisis

A financial crisis

A financial crisis is often associated with a panic or a bank run where investors sell off assets or withdraw money from savings accounts.

  • Asset prices drop in value.
  • Consu...

Causes of a financial crisis

Generally, a crisis is caused if institutions or assets are overvalued, and can be worsened by panic and herd-like investor behaviour.

Contributing factors include systemic failures, unexpected or uncontrollable human behaviour, regulatory absence or failures, or contagions that is like a virus that spread from one institution or country to the next. If left unchecked, an economic crisis can cause a recession or depression.

Financial crisis examples

  • The Stock Crash of 1929. On Oct. 24, 1929, share prices collapsed after a period of wild speculation and borrowing to buy shares. It led to the Great Depression, which was felt worldwide. One trigger of the crash was a drastic oversupply of commodity crops, which led to a steep decline in prices.
  • The 20007-2008 Global Financial Crisis. This was the worst economic disaster since the Stock Market Crash of 1929. It started with a subprime mortgage lending crisis in 2007. Then it moved into a global banking crisis with the failure of investment bank Lehman Brothers in September 2008.