What is comparative advantage when it comes to products or industry?
Comparative advantage is when one firm or nation can produce a product for a lower opportunity cost than another firm or nation. Let’s say country A can produce 10 apples and 10 oranges. Country B can produce 5 apples or 10 oranges. Both countries have a comparative advantage in one of the goods. Country A has the comparative advantage in apple production. To produce an apple, country A will only need to sacrifice 1 orange, while country B would have to sacrifice 2 oranges in order to get the same apple. At the same time, country B has the comparative advantage in orange production. While country A would have to forgo 1 apple to get an orange, country B only has to forgo 1/2 of an apple to get 1 orange. To benefit from trading, the countries would produce the product that they had the comparative advantage in (apples for A and oranges for B) and then trade to get optimal amounts. Society is better off because resources are being used most efficiently when this scenario occurs.
