Comparative advantage is the ability of a person, company or country to produce a good using relatively less resources than another. It is one of the basic foundations of trade between countries, taking as decisive the relative costs of production and not the absolute ones. In other words, countries produce goods that imply a lower relative cost to the rest of the world.
The comparative advantage model is one of the basic concepts underlying the theory of international trade and shows that countries tend to specialize in the production and export of those goods they manufacture at a relatively lower cost than the rest of the world, in those who are comparatively more efficient than others and who will tend to import the goods in which they are most ineffective and which therefore produce comparatively higher costs than the rest of the world.
The model of comparative advantage was developed by economist David Ricardo as a response and improvement of Adam Smith’s theory of absolute advantage. According to the point of view provided by Ricardo in the nineteenth century, countries specialize in the production and export of those goods that they can manufacture with relatively lower costs.
David Ricardo’s theory constitutes the essence of the argument for free trade. At present David Ricardo’s assumptions have been criticized mainly because he considered constant costs at any level of production and did not take into account diminishing returns. But even today David Ricardo’s theory continues to be valid, and is defended by a large number of economists. In addition, new formulations of the principle of comparative advantage have been made on more general hypotheses which show that the essence of the Ricardian idea is valid.
Each country in question will specialize in what is most efficient, while importing the rest of products in which they are most inefficient in terms of production. Even if a country does not have an absolute advantage in producing some good, it can specialize in those goods in which it finds a greater comparative advantage and finally be able to participate in the international market.
It is then the basic idea that countries choose to specialize to be able to trade in activities where it has some advantage and not in what to do better compared to others. Therefore, the difference with the theory of absolute advantage lies in the fact that it does not produce what the country costs less, but the one with the lowest comparative costs.
According to the theory of comparative advantage, this advantage will come from the opportunity cost that is faced in the production of each good. In other words and applying a simple example, to produce bananas you should sacrifice less leaving aside the production of apples. Formally, the country produces a good and exports it because it has a relative lower cost to that of another country since it dispenses with the production of less quantity of good.
Following this pattern of conduct trade takes place and there are importing and exporting countries that operate under the idea of efficiency. A very simple scheme that quickly became one of the fundamental pillars in the study of international trade.