Comparative Advantage See

Comparative Advantage See

Comparative Advantage. See Comparative Cost.

Comparative Cost (Comparative Advantage), the principle that under given technological conditions the increased product obtainable from specialization and exchange rather than from a policy of self-sufficiency and economic isolation will be maximized when each country or region specializes on the production of those goods and services in which its comparative advantage is largest (that is, its comparative cost of production is least). Although first clearly stated by Hicardo in developing the theory of international trade, the doctrine can be applied to all forms of specialization, or 'territorial division of labour', and exchange, whether between persons, businesses or nations.

There are three kinds of differences in costs: absolute, comparative and equal. They may be illustrated by simple examples of two countries, A and B, producing the same two commodities x and y. If A and B are differently endowed with resources, their production costs are likely to differ.

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