comparative advantage
The economic principle that a country should specialize in producing goods where it has the lowest opportunity cost, even if it is less efficient in absolute terms than trading partners.
Example
“Even if the US is more efficient at everything, comparative advantage suggests trading with countries that specialize in different goods.”
Memory Tip
COMPARATIVE ADVANTAGE = do what you're RELATIVELY best at, even if you're not absolutely best.
Why It Matters
Understanding comparative advantage helps you make better decisions about how to allocate your time and money. Rather than trying to be good at everything, you can focus on activities where you have the lowest opportunity cost, allowing you to earn more income or save more money overall through specialization and trade.
Common Misconception
Many people confuse comparative advantage with absolute advantage and assume that the most efficient producer should always make a product. In reality, even if someone is better at multiple tasks, they should specialize in what they do relatively best compared to their opportunity cost, not just what they do best in absolute terms.
In Practice
A lawyer who earns 200 dollars per hour could type documents faster than a secretary who earns 25 dollars per hour. However, the lawyer should focus on legal work because the opportunity cost of typing is 200 dollars per hour, while the secretary can type at an opportunity cost of only 25 dollars per hour. Both benefit when the lawyer practices law and the secretary handles typing, even though the lawyer is better at typing in absolute terms.
Etymology
COMPARATIVE (relative, in comparison) ADVANTAGE. The ADVANTAGE of producing what you do COMPARATIVELY better.
Common Misspellings
Learn economics & finance from top universities
Related Terms
More in economics
Other economics terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.