Comparative Advantage

This exists when a firm or a jurisdiction can produce a good or service with less forgone output (opportunity cost) than another can. Cf. Absolute Advantage, with which comparative advantage is often confused. Call centres are increasingly located in India, not because their location there involves fewer inputs for any given number of calls dealt with (absolute advantage), but because the output lost from using (mainly, in this case) people in this way rather than another is smaller than it would be in, say, most European countries or North America. Some countries have an absolute advantage in producing nearly everything, but it is impossible for them to have a comparative advantage in everything. Conversely some countries have an absolute advantage in virtually nothing but they necessarily have a comparative advantage in something. Total world production increases, and therefore consumption possibilities increase, if countries specialize according to their comparative, not absolute, advantages. Of course, how these gains from specialization are shared is another matter.

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