Comparative Advantage Besides 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, company or country to produce a good or service at a lower opportunity cost, which constitutes the most valued alternative offered to engage in an activity, compared to a competitor. 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 lost on an isolated island. To survive, they must search for food and drink, build shelter, etc. The first man is young, strong and active, which allows him to catch fish and find shelter more effectively. This is its absolute advantage. The other man is old and weak. He can only do simple things like pick fruit or look for cooler water. Obviously, his advantage over the young man is less. However, their own absolute advantage cannot help them survive. They must work together. The young man can fish and find shelter, while the old man searches for fruit and water. In doing so, each of them specializes in certain work in which it has a comparative advantage and obtains the goods it needs through trade. The following example will show us more clearly how comparative advantage helps us gain more from trade. Imagine that you and your neighbor both have the same number of apple and cherry trees. You can pick 5 pounds of apples and 8 pounds of cherries after the first week. While your neighbor picks 3 pounds of apples and 10 pounds of cherries. So the apple is your absolute advantage and the cherries are your neighbor's absolute advantage. If you just focus on picking 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 he decides to exchange 2 pounds of cherries for 1 pound of your apple. After trading, 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 are both better off. Clearly understanding comparative advantage is very helpful in profiting from trade. Say no to plagiarism. Get a tailor-made essay on “Why violent video games should not be banned”?Get the original essay