- noun the fact of being able to produce a good or service at a lower cost than other producers.
- (written as Comparative Advantage)This exists when a firm or a jurisdiction can produce a good or service with less forgone output (opportunity cost) than another. Call centres are increasingly located in India not because their location there involves fewer inputs for any given number of calls (absolute advantage) but because the lost output from using people in this way rather than in another is smaller than it would be in, say, most European countries or North America. Some countries have an absolute advantage in producing nearly everything but it is impossible for them to have a comparative advantage in everything. Conversely, some countries have an absolute advantage in virtually nothing but they too necessarily have a comparative advantage in something. Given certain assumptions, total world production increases, and therefore consumption possibilities increase, if countries specialize according to their comparative, not absolute, advantages. Of course, how these gains from specialization are shared is another matter. Whether the efficiency gains exist in practice requires a judgment about second best, in view of the prevalence of tariffs and other barriers to trade. Comparative advantage forms the basis of most economic arguments for free trade.