Comparative Advantage

A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor.

Let's break this down into a simple example. Suppose that two firms both produce two main products: ice cream and bicycles. The first firm, the Danish Ice Cream and Bicycle Co., is located in Denmark, where dairy milk is abundant; the second firm, the Gobi Ice Cream and Bicycle Co., is smack in the middle of the Gobi Desert.

The Gobi Ice Cream and Bicycle Co. must spend a lot of money to make ice cream, whereas the Danish Ice Cream and Bicycle Co. spends way less to produce the same amount. The two firms are dead even in their production costs for bicycles.

Because the Danish Ice Cream and Bicycle Co. has a comparative advantage with ice cream production, it should probably consider turning exclusively to ice cream. Along the same vein, the Gobi Ice Cream and Bicycle Co. should probably give up the ice cream and focus on the product in which it is the least disadvantaged (bicycles).


Investment dictionary. . 2012.

Look at other dictionaries:

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  • Comparative Advantage —    The idea of “comparative advantage” is a principal component of the doctrine of free trade; it was articulated most coherently in The Principles of Political Economy, published in 1819 by the economist David Ricardo. Developing ideas on… …   Encyclopedia of the Age of Imperialism, 1800–1914

  • comparative advantage — Gen Mgt an instance of higher, more efficient production in a particular area. A country that produces far more cars than another, for example, is said to have the comparative advantage in car production. David Ricardo originally argued that… …   The ultimate business dictionary

  • comparative advantage — Economic theory first advanced by Robert Torrens and David Ricardo that analyzes international trade in terms of differences in relative opportunity costs. The theory suggests that countries should specialize in the goods they can produce most… …   Universalium

  • comparative advantage — The relative efficiency in a particular economic activity of an individual or group of individuals over another economic activity, compared to another individual or group. One of the fundamental propositions of economics is that if individuals or …   Accounting dictionary

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  • comparative advantage — noun : the advantage enjoyed by a person or country in the cost ratio of one commodity to another in comparison with the ratio of costs of these same commodities elsewhere …   Useful english dictionary

  • comparative advantage —   the idea that areas tend to be more efficient in certain economic activities than others and so should specialise in them in order to maximize their quality of life through trade …   Geography glossary

  • comparative advantage — relative benefit, something which is beneficial when compared to the other options …   English contemporary dictionary

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