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Comparative Advantage Definition

investopedia.com

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, ...

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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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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 h...

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  • 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...

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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 ...

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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 ...

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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 e...

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