Comparative advantage.
Definition
An economic principle stating that countries benefit from trade when each specializes in producing goods for which they have the lowest opportunity cost, even if one country can produce everything more efficiently. This concept explains why international trade is mutually beneficial.
Examples
Real-world.
- 1 Saudi Arabia has a comparative advantage in oil production due to its vast reserves and low extraction costs
- 2 Bangladesh specializes in textile manufacturing because of its low labor costs
- 3 The U.S. has a comparative advantage in technology and higher education services
Key Fact
David Ricardo introduced comparative advantage theory in 1817.