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Comparative Advantage

  Comparative advantage, in economics, is a principle of trade which holds that there is a benefit to specialization and trade where there are differences between countries in the relative efficiency of producing two products, even though one country has an absolute advantage in producing both products.

This principle, first described by Ricardo, demonstrates how countries can gain from trading with each other even if one of them is more efficient in every activity. For example, suppose nation A could use its resources to produce wheat or cotton or some combination of the two. Suppose further, that nation A can produce both wheat and cotton cheaper (with less resources) than nation B, so that nation A has an absolute advantage in the production of both wheat and cotton. Nation A can benefit, nevertheless, from specialization in the production of that product whose relative cost is lower and then trade that product with nation B for the other product.

Comparative advantage arises from the uneven distribution of the world\'s resources together with the requirement of different proportions of factors of production to produce different commodities and services. Resources in this context include natural resources, capital goods, size and training of the labour force, and technical knowledge. TF



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