Can you explain this term? "Comparative Advantage"

[ThomWV]

I would appreciate it if you would explain the term "Comparative Advantage" to me and the rest of the readers here at DU.

On edit: I mean what does it mean in reference to economics, not social issues.

Hail to the Chief.

[Hello_Kitty]

1. It's when already obscenely wealthly people get even richer off of cheap exploited labor.

At least that's what it means to me.

[leftstreet]

2. Goes hand in hand with "lower opportunity cost"

wait, what?

[rockymountaindem]

3. I probably won't be the first because I'm a slow typist, apparently

but comparative advantage refers to a natural advantage that one country has in the production of a certain product compared to other potential producers of that product. Adam Smith first developed the concept in reference to the trade of wine and wool between Portugal and England. Instead of each country trying to become self-sufficient in both products, Portugal should focus on wine, because they have the comparative advantage in wine over England, and England should focus on wool for the same reason. This would allow each country to produce more of each good and become specialized, yielding improved production over time. This would result in greater total stocks of wine and wool, which the two countries could then trade with each other in order to maximize their total consumption of each good.

It is related to the concept of "opportunity cost". Sticking with Smith's example, it might be possible for England to become self-sufficient in wine production, but at the cost of a great deal of wool production for which they are better suited. This is the "opportunity cost" in terms of wool for potential wine production. Therefore, it would be better for England to focus on wool production, generating as much as possible, and then trade the surplus for Portuguese wine, as the overall cost of wine from Portugal, both in real terms and in terms of opportunity cost, will be lower than if England tried to produce all its wine at home.

[ThomWV]

4. Could you substitute things like Oil and Wheat for Wine and Wool?

Textbook! Excellent. Now, could oil from one country be exchanged for wheat from another even though one is a natural resource and the other comes from the sweat of a man's brow, the toil of the farmer? Does that make any difference?

PS: Or even exchange services for goods? (I know this is a tricky one)

[rockymountaindem]

7. Yes and yes

We can exchange whatever we want because we have money as a substitute for actually schlepping things around in a barter economy. Comparative advantage mainly suggests where countries should focus their efforts. Examples are obvious... think what would happen if the Saudis tried basing their economy on wheat. For Adam Smith's example, the warm climate which made Portugal good for wine production was a natural resource of a kind.

[sandnsea]

5. Or why we have bananas in Oregon

in short.

Nice explanation.

[Romulox]

6. It means that your job is going to a country with lower standards w/r/t environment, workers' rights

and standard of living.

[SergeyDovlatov]

8. absolute advantage over comparative advantage

rockymountaindem did a great explanation.
I want to expand it a little bit to show how it differs from absolute advantage.

Take individuals.

Bill is a software engineer and Walter is a typist.
For the sake of the argument, let's say that Bill also types really well, even faster than Walter.

Bill has absolute advantage over Walter.

He can type better than Walter
He can design programs better than Walter.

However, it doesn't mean that Bill need to write programs and be a typist.

Since an hour of Bills time spending desining programs is much more valuable that an hour of Bill typing a memo for somebody else. It follows that Bill need to focus on writing software and William on typing memos.

[anaxarchos]

9. The explanation is a good start but...

...as with any economic theory, there is a foundation of assumptions which it is important to understand.

The simple theory of Comparative Advantage was set out by David Ricardo, using the original wine/wheat example, in his Principles of Political Economy and Taxation (1817). You can find a searchable copy here:

http://www.econlib.org/


The important assumptions are:

•There are no transport costs.

•Costs are constant and there are no economies of scale.

•There are only two economies producing two goods.

•The theory assumes that traded goods are homogeneous (ie identical).

•Factors of production are assumed to be perfectly mobile.

•There are no tariffs or other trade barriers.

•There is perfect knowledge, so that all buyers and sellers know where the cheapest goods can be found internationally.