Comparative advantage in trade refers to a country’s advantage in producing a particular good or service due to infrastructure, workforce, technology, or natural resources. Countries should focus on producing goods where they have an advantage and import goods where they don’t. This creates a win-win situation for all nations engaged in foreign trade.
A comparative advantage in trade is the advantage one country has over another in producing a particular good or service. This advantage can come from a country’s infrastructure, workforce, technology or innovations, or natural resources. Using comparative advantage in trade requires that countries must put most of their effort into producing those goods where they possess a comparative advantage. The contrast of this is that countries should attempt to import those goods which are at a comparative disadvantage to them, thus creating a win-win situation for all nations engaged in foreign trade.
Trade between nations has always been a large part of the global economy. This is even more true in modern times, considering the remarkable advances in both transportation and communication that technology has offered. Every country in the world has specific products that they are able to produce at a high rate and low cost compared to other nations. This fact is what drives the notion of comparative advantage in trade.
As an example of how comparative advantage in trade manifests itself, imagine two countries engaged in the production of automobiles. Country A has been manufacturing cars for a long time and has implemented various technological advances that allow them to produce cars at low cost. In contrast, the automotive industry in Country B is just starting out, and as a result, neither the available labor force nor raw materials are conducive to high-end manufacturing.
In this case, it makes sense for country A to devote a large part of its resources to car production. Country A should also focus on exporting cars to countries like Country B that lack the capacity to produce them at high levels. On the other hand, Country B is wasting its efforts trying to produce high-end cars. Instead, the concept of comparative advantage in trade assumes that this country should focus on those goods it is best equipped to produce.
Any country that uses a comparative advantage in trade to export goods should also be prepared to import those goods where it lacks an advantage. Investing in producing those goods where the advantage lies means facing the opportunity cost of that extra production. This opportunity cost is worthwhile, as the country in question can generally reap the rewards from the exports it sells to other countries. With this system in place, it is possible for all trading partners to play to their strengths, buffer their weaknesses and always benefit from international negotiations.
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