In economics, an entity (usually a country, but it could be a region, state, or even a person) has comparative advantage over another entity when it can produce a good at a lower opportunity cost than the other entity can. Please note that this does NOT mean that the first entity can produce more of the good or that it can produce it more efficiently. Instead, it just means that the first entity has a...
In economics, an entity (usually a country, but it could be a region, state, or even a person) has comparative advantage over another entity when it can produce a good at a lower opportunity cost than the other entity can. Please note that this does NOT mean that the first entity can produce more of the good or that it can produce it more efficiently. Instead, it just means that the first entity has a lower opportunity cost for producing that good.
Opportunity cost is the value of what is given up when one makes a particular choice. Let us imagine that your country could produce either cars or trucks (or a mixture of both). Whenever you decide to make more cars, you give up the ability to make a certain number of trucks. The number of trucks that you have to forego making is your opportunity cost. If your country and another country both made cars and trucks, you would have a comparative advantage in cars if you had a lower opportunity cost for making cars. That is, you would have a comparative advantage if, every time you made an additional car, you gave up the opportunity to make fewer trucks than the other country.
Comparative advantage, then, occurs when you (or your country) can make something at a lower opportunity cost than some other person (or country). Please follow the link below for an example that is explained in detail with number to illustrate it.
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