Question

What is comparative advantage?

Short answer

Comparative advantage is when a person, area, or country can produce a good at a lower cost than producing other goods.

Step-by-step solution

Explanation

Different countries have different opportunity costs when it comes to manufacturing a certain good, either because of differences in their economies or because of differences in their political systems. Climate, geography, technology, and abilities are all factors to consider.

Illustration with help of PPF

The PPF (Production Possibility Frontier) of two countries producing two distinct crops will be used to demonstrate this.

Assume that two countries, the United States and Brazil, must decide how much of each of the following crops they will produce: cane sugar as well as wheat.

Brazil can produce a lot of sugar cane per acre due to its climatic conditions, but not much wheat.

In contrast, the United States can produce a lot of wheat per acre but not much sugar cane.

Brazil has a lower opportunity cost of sugar cane production (in terms of wheat) than the United States. The opposite is also true: the United States has a lower opportunity cost of wheat production (in terms of sugar cane) than Brazil.

The PPF in the United States is flatter than the PPF in Brazil.

In other words, in terms of sugar cane, the opportunity cost of wheat in the United States is lower than in Brazil. Brazil, on the other hand, has a lower potential cost for sugar cane. Wheat is a comparative advantage for the United States, and sugar cane for Brazil.