Answer to Question #112060 in Macroeconomics for Rosalina

Question

What is comparative advantage?

Answer 1

Comparative advantage is the economic situation in which a country or firm has the ability of producing a good or service at a lower opportunity cost, relative to the its competitor. In this case, the country will choose to specialize in the production of that commodity for both its own consumption and export.This explains the reason for engagement in international trade. For example; Country A produces 20 tonnes of commodity X and 30 tonnes of commodity Y while country B produces 5 tonnes of commodity X and 25 tonnes of commodity Y. Country A has a comparative advantage in producing commodity X, hence the need to specialize in its production and leave commodity Y to country B. By doing so the total output will increase.