Comparative advantage In addition to absolute advantage, comparative advantage is another concept that everyone should be familiar with as it plays an important role in trade. Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost, which represents the higher-value alternative offered for engaging in an activity compared to competitors. An important economic principle that everyone knows is: the basis of trade is comparative advantage, not absolute advantage. But why? The following example will help us answer this question. There are two men missing on a remote island. To survive they must search for food and drink, shelter, and so on. The first man is young, strong and active, so he can catch fish and create more effective shelter. This is its absolute advantage. The other man is old and weak. It can only do simple things like pick fruit or look for more fresh water. Obviously his advantage over the young man is smaller. However, their absolute advantage cannot help them survive. They have to work together. The young man can fish and shelter, while the old man searches for fruit and water. In this way, each of them specializes in some jobs for which he has a comparative advantage and obtains the goods he needs through trade. The next example will show us more clearly how comparative advantage helps us get more from trade. Imagine that you and your neighbor both have the same number of apple and cherry trees. You can harvest 5 pounds of apples and 8 pounds of cherries after the first week. While your neighbor picks 3 kilos of apples and 10 kilos of cherries. So the apple is your absolute advantage, and the cherries are your neighbor's absolute advantage. If you focus on picking only apples, you can have 15 pounds of apples in the second week. Your neighbor does the same thing as you, he will have 20 pounds of cherries and decides to trade 2 pounds of cherries to get 1 pound of your apple. After the trade, you will have 10 pounds of apples and 10 pounds of cherries. Your neighbor has 5 pounds of cherries and 10 pounds of cherries. Compared to the first week, you both feel better. Clearly understanding comparative advantage is very helpful in gaining an advantage in trade. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay