Question

What is comparative advantage?

Short answer

Comparative advantage is the ability to produce a good with lesser opportunity cost.

Step-by-step solution

Opportunity Cost Concept 

Opportunity Cost is the cost of next best alternative foregone while choosing an alternative.

In case of 2 goods production possibilities, good 1 has opportunity cost in terms of good 2 sacrificed & vice versa also.

Comparative Advantage Concept

Comparative Advantage is when an economy can produce a good with lesser opportunity cost (ie other goods sacrificed), as compared to other economy.

Example 

Production Possibilities of Country 1 & Country 2, for Good 1 & Good 2 :

Production Possibilities of Country 1 & Country 2, for Good 1 & Good 2 :

	G1	G2
C1	100	400
C2	200	300

Country 1 can produce good 1 by sacrificing 100/400 = 0.25 units of good 2, which is lesser than country 2 sacrifice of good 2 for good 1 (200/ 300 = 0.66 units). So, country 1 has comparative advantage in production of good 1.

Country 2 can produce good 2 by sacrificing 300/ 200 = 1.5 units of good 1, which is lesser than country 1 sacrifice of good 1 for good 2 (400/ 100 = 4 units). So, country 2 has comparative advantage in production of good 2.