Comparative Advantage:
It is referred as the advantage of a party to be capable of producing any given commodity at an opportunity cost lesser than other entities. In economic terms it can also be referred to be as the ability of one person or party to produce a particular service or good at a lower opportunity and marginal cost over another service or good (Stern, 2011).
Major sources of Comparative Advantage:
- Technology Differences:
Firms or countries with more enhanced machinery and equipments may provide more production when compared to the firms or countries using the old method and machineries.
- Differences in factors of production as land, labor, capital:
Differences in the rate and availability of such factors of production make the difference. The availability of these factors to one party as compared to the other creates the major source of comparative advantage.
Example:
Two goods are produced, juice and ice-cream, with the use of labor as input. Suppose Nation X requires 20 and 10 units of labor to produce one unit of juice and ice-cream, respectively, whereas Nation Y requires 20 units of labor for each product. In such a scenario, while Nation Y will have to forego 1 unit of juice for production of an additional unit of ice-cream, Nation X will have to forego only and half a unit of juice for the same.As Nation X can produce ice-cream at a lower opportunity cost, so it’s best for it to make and export it, i.e. concentrate in the production of ice cream (Stern, 2011). On the other hand, Nation Y has to give up only one unit of ice cream for production of additional unit of juice as divergent to a loss of two units of ice-cream in case of Nation X. Therefore, Nation Y must specialize in the production of Juice.
References:
Stern, R. M. (2011). Comparative Advantage, Growth, and the Gains from Trade and Globalization: A Festschrift in Honor of Alan V Deardorff. World Scientific.
