Hello,
after doing the first quiz questions for topic five, I realized that I don't really understand the difference between competitive and comparative advantage. Could you please explain it again? How do I differentiate?
Thank you.
In reply to Deleted user
Re: difference between competitive and comparative advantage
by Erika Graf -
Adam Smith stated that a country benefits by producing only those products in which it has an absolute advantage, that is it can produce using fewer resources than another country. Each country gains by specializing in the production of certain products, exporting them, and importing the products it does not have an absolute advantage in producing.
The Comparative Advantage Principle, however, says, what matters is not the absolute cost of production, but rather the relative efficiency (or opportunity cost) with which the two countries can produce the products. Therefore, it can be beneficial for two countries to trade without barriers as long as one is relatively more efficient at producing goods or services needed by the other. It is the ratio of production costs between the two countries that matters.
Hope that helps. By the way, this is explained very much in the beginning of the first video on international trade theories. Textbooks on international economics provide numerical illustrations, which I excluded as you do not have to calculate this in the exam.
The Comparative Advantage Principle, however, says, what matters is not the absolute cost of production, but rather the relative efficiency (or opportunity cost) with which the two countries can produce the products. Therefore, it can be beneficial for two countries to trade without barriers as long as one is relatively more efficient at producing goods or services needed by the other. It is the ratio of production costs between the two countries that matters.
Hope that helps. By the way, this is explained very much in the beginning of the first video on international trade theories. Textbooks on international economics provide numerical illustrations, which I excluded as you do not have to calculate this in the exam.