Comparative advantage

This kind of advantage is applied daily in our lives with effects not only on trade, but also on the jobs we do every day. Comparative advantage refers to the ability that an individual, a company or a country may have to produce a good through a series of fewer resources than others. It is a basic foundation in countries' economic development because it assumes important costs with respect to production. Countries can produce goods at a lower cost than other countries around the world.

Related topics

Imperfect competition, perfect competition, market economy

 

What is comparative advantage?

This type of advantage is the one that tells us that countries should focus on producing what is easiest for them, and then start trading the products that are hardest for them to produce.

About the theory of comparative advantage

The theory of comparative advantage tells us that each country can specialize in the things in which they are most efficient by neglecting the issues or products in which they are most inefficient when it comes to production. If the country does not have a total advantage in the production of a given good, it can always specialize in products in which it can find an advantage in order to incursion into international market.

In other words, the theory consists of fixing the basic idea that countries should specialize in products where they have an advantage, producing what is simplest for them with the lowest costs. The country can produce a product and export it for a lower cost than that of another country.

David Ricardo and the comparative advantage theory

David Ricardo was born on April 18, 1772 in London, England. He was an important English economist who gave a classical and systematized form to the economy in the 19th century. His laissez-faire doctrines were identified in his Iron Wages Act, which established that all attempts to improve the real workers’ incomes were pointless and that wages by force were kept close to the subsistence level.

Richard’s interest in economics grew out of a reading on Adam Smith’s Wealth of Nations. In 1809, he began writing newspaper articles on monetary issues that led him to great controversy at the time. At that time he advocated the resumption of the convertibility of paper currency into gold. He wrote a couple of treatises articulating his arguments and delineating what has since become known as the “classical approach” to the theory of money.

David Ricardo was the molder of the comparative theory initially introduced by Adam Smith, explaining to countries that the best thing for their economy was to specialize in the things or goods that were easiest for them to produce and then, after producing these products, start trading to obtain the goods that were difficult for them to produce. He was in charge of giving a logical explanation of the advantages that people have when they know how to take advantage of resources to achieve a greater yield. The theory has been a fundamental basis for international trade today.

Causes

Generally three different factors are named that are considered decisive for a country to have a comparative advantage and these are:

• Different climates and different natural resources, since product production largely depends on them.
• Different endowments of factors and resources.
• Different technologies and forms of specialization.

Consequences

The comparative advantage results in international trade, as there is a constant exchange of goods between countries. Depending on the type of climate and the amount of natural resources present in the country, there will be more or less goods to be exported.

Importance of comparative advantage

Under the aspect that through foreign trade it is possible to significantly increase a country’s production and wealth if they focus on producing the goods or services in which they are more competitive, the comparative advantage is very important for markets, since countries are able to obtain mutual benefits when they are able to import goods that are cheaper in other places than to produce them domestically, and export those goods that produce more benefits by producing them domestically instead of importing them. This creates more competition and more productivity by encouraging the economy.

Examples

• Colombia: In this country, there is a great availability of pastures, huge livestock herds and a stable solar energy, so that, the agro-ecological conditions are adequate for international trade of certain products.
• Spain: According to the comparative advantage index, Spanish industry specializes in the production of wines at a relatively low cost and in exports of the same in large quantities.