Comparative Advantage Definition

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

Define Comparative Advantage In Simple Terms

Comparative advantage is a country or company’s ability to produce goods and services at a lower opportunity cost than other countries or companies. 

An opportunity cost is a potential economic benefit that a country or firm loses out on when producing one good or service over another. 

By producing goods with the lowest opportunity cost, countries realize the greatest economic benefits; therefore, comparative advantage allows a company to sell goods and services at a lower price and realize stronger sales margins than its competitors.

Comparative Advantage Example

For example, Country A and Country B produce both avocados and bell peppers. 

Let’s say Country A produces 200 avocados and 100 bell peppers per year.

Country B produces 300 bell peppers and only 100 avocados.

Country A has the ability to produce more avocados at a lower opportunity cost, due to the fact that Country A receives more sunlight which avocados need to grow. 

This gives Country A the comparative advantage in producing avocados. 

Country B is less sunny on the other hand and is able to grow more bell peppers. 

Therefore it has a comparative advantage in producing bell peppers. 

Theoretically, if both countries produced the goods in which they have the comparative advantage, both more avocados and bell peppers would be produced and both economies would benefit. 

Comparative Advantage vs. Absolute Advantage

Absolute advantage, though similar to comparative advantage, refers to the ability to produce more or better goods and services than their competitor, not necessarily at a lower opportunity cost. 

Comparative advantage incorporates opportunity cost in the analysis when choosing between options for optimum production. 

Comparative Advantage Definition FAQs

Comparative advantage is a country or company’s ability to produce goods and services at a lower opportunity cost than other countries or companies.
By producing goods with the lowest opportunity cost, countries realize the greatest economic benefits; therefore, comparative advantage allows a company to sell goods and services at a lower price and realize stronger sales margins than its competitors.
Absolute advantage is the ability to produce more or better goods and services than their competitor, not necessarily at a lower opportunity cost, while comparative advantage incorporates opportunity cost in its analysis.
Comparative advantage incorporates opportunity cost in the analysis when choosing between options for optimum production.