Comparable Advantage

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COMPARABLE ADVANTAGE 3

ComparableAdvantage

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ComparableAdvantage

Comparableadvantage is a concept used to describe the capacity of one party togenerate a particular service or product at a lower opportunity andmarginal costs when compared to some other party. A party can be aperson, a firm, or a country. It isoften abbreviatedas CA. Comparable advantage provides an explanation on how value canbe created by trade for both parties even if one of the parties cangenerate goods using fewer or lessresources compared to the other party. The advantages derived fromsuch trade arereferredto as gains from a trade.

DavidRicardo was the first person to provide an explanation on comparableadvantage. He did so in his book named “On the Principles ofPolitical Economy and Taxation”, which waspublishedin 1817. In his book, Ricardo used the production of wine and clothin Portugal and England. In Portugal, cloth and wine production canbe accomplished using less labor than it takes to produce the sameproducts in England. However, the cost of producing both commoditiesvaries among the two nations. Wine production in England is muchharder and expensive compared to Portugal while cloth production isslightly harder in Portugal than in England.

Consequently,the two nations gain from doing business together where Portugalproduces wine in excess and export the surplus to England in exchangefor cloths.Thus, England gets cheaper wine and clothswhile Portugal gains in the same way too. The conclusion of thisprinciple is that every country gains from specializing in theproduction of a specific good that it is capable of producing at alower cost and trading that commodity for other commodities that itis unable to produce at lower costs in comparison to another country.

References

Rumelt,R. P. (2003). What in the world is competitiveadvantage? Policyworking paper,105,1-5.

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