Comparative Advantage

Comparative advantage refers to the difference between two producers in terms of opportunity cost. It is different from absolute advantage, which refers to a straightforward advantage in efficiency. One producer may actually be less efficient in producing a product but still have a comparative advantage.

To take a very simple example: Two kids in Florida have competing lemonade stands. Lucy is far more efficient in producing lemonade than Charlie Brown. Charlie Brown is clumsy and drops his lemons and cuts himself a lot, so it takes him longer to produce his lemonade. His labor costs are therefore higher. However, Charlie Brown has a lemon tree in his backyard, while Lucy must buy her lemons elsewhere. It would make more sense for Lucy to trade for lemonade with Charlie Brown and perhaps specialize in production of something else.

Say, for example, she has blueberries on her property. Even though, with her superior manual dexterity, she can make both blueberry pies and lemonade more efficiently than Charlie Brown, she will do better to focus her production on blueberry pies, where she has a comparative advantage, and to trade for her lemonade with Charlie Brown. In theory, if both of them focus their energy on production in the areas in which they have comparative advantage, they will both be richer than if Lucy attempts to out-produce Charlie Brown in everything just because she is more efficient.

Although “producer” here may mean an individual or a single company, the concept is most often applied to international trade