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Comparative advantage

Comparative advantage is an economic principle that explains how trade can benefit two countries or entities even if one of them has an absolute advantage in producing all goods.

The principle of comparative advantage states that countries should specialize in producing the goods that they can produce more efficiently or at a lower opportunity cost than other countries. Opportunity cost refers to the cost of forgoing the production of one good in order to produce another good.

For example, if Country A can produce both cars and computers more efficiently than Country B, it may still be more advantageous for Country A to focus on producing cars and trade with Country B for computers. This is because, even though Country A has an absolute advantage in producing both goods, it still has a comparative advantage in producing cars, as the opportunity cost of producing cars is lower for Country A than it is for Country B.

By specializing in the production of the goods in which they have a comparative advantage, countries can produce more of both goods and achieve higher levels of economic welfare. This principle is a fundamental basis for international trade and has been a key driver of globalization.

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