What is a Comparative Advantage?

Comparative advantage is the ability of one entity to produce goods or services with similar quality but at a lower unit price than other competing entities. In most cases, the principle of comparative advantage is utilized to compare the output in production between two countries that produce the same type of good or service. Sometimes referred to as an absolute advantage, the process will address several aspects of the production process.

Comparative advantages, in order to be accurate, must define the perimeter of factors that will be under consideration. Opportunity cost is one common element that is used in just about every example of comparative advantage. Essentially, opportunity costs are the economic costs involved in using a resource for a specific activity. Within this context, the comparative advantage will address what consequences, if any, the entity will experience by choosing to use resources to produce a given product rather than use the resources in a different application.

Along with addressing the opportunity cost, a comparative advantage will also look at the overall production of the good or service within a given time frame. This helps to identify any incidences where outside factors within each production environment seem to help or hinder the rate of production consistently. If there are factors such as political unrest or recurring weather conditions that influence the rate of production, these will be noted.

Finally, the comparative advantage just about always addresses the bottom line price per unit produced. This figure, while not the single most important element in a comparative advantage, does have a huge impact. The ability to produce goods at a low cost often means the ability to sell the units at a competitive price but still realize more profits from the activity. Efficiency in production is often the factor that most greatly influences the production cost per unit, but the cost and availability of raw materials will also play a significant role in determining the price of manufacturing each unit for sale.