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Comparative Advantage

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The comparative advantage is the ability of a person, company or country to produce a good using relatively less resources than another.

The concept of comparative advantage is one of the basic foundations of international trade. It assumes as decisive the relative costs of production and not the absolute ones. In other words, countries produce goods that have a lower relative cost compared to the rest of the world.

The comparative advantage model was developed by economist David Ricardo as a response and improvement of Adam Smith's theory of absolute advantage. According to the point of view contributed by Ricardo in the 19th century, countries specialize in the production and export of those goods that can be manufactured with relatively lower costs.

Theory of comparative advantage

Each country in question will specialize in what is most efficient. At the same time, the rest of the products in which they are most inefficient in terms of production will be imported. Although a country doesn't have an absolute advantage in producing any good, it may specialize in those goods in which it finds a greater comparative advantage and finally be able to participate in the international market. In this sense, it can boost its foreign trade.

It's then the basic idea that countries choose to specialize in order to trade in activities where they have a certain advantage. That is, instead of producing what they do best in an absolute way, they produce what they do best in a relative way. Therefore, the difference with the theory of absolute advantage is that it doesn't produce what the country costs less, but the one with lower comparative costs.

According to the theory of comparative advantage, said advantage will come from the opportunity cost faced in the production of each good. In other words and by applying a simple example, to produce bananas you must sacrifice less leaving aside the apple production. Formally, the country produces a good and exports it because it has a relative cost less than that of another country since it dispenses with the production of less quantity of good.

Following this pattern of conduct, trade takes place. Consequently, there are importing and exporting countries that operate under the idea of efficiency. A very simple scheme but that quickly became one of the fundamental pillars in the study of international trade.

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