How can you use comparative advantage to succeed globally?

1 What is comparative advantage?

Comparative advantage is a term coined by the economist David Ricardo in the 19th century. It refers to the ability of a country or region to produce a good or service at a lower opportunity cost than another. Opportunity cost is the value of the next best alternative that is forgone as a result of making a choice. For example, if you can produce either 10 units of wheat or 5 units of wine in an hour, your opportunity cost of producing one unit of wheat is half a unit of wine, and your opportunity cost of producing one unit of wine is two units of wheat. You have a comparative advantage in producing wheat if your opportunity cost of wheat is lower than that of another country or region.

2 How to calculate comparative advantage?

To calculate comparative advantage, you need to compare the opportunity costs of producing different goods or services between two countries or regions. The one with the lower opportunity cost has the comparative advantage in that good or service. For example, suppose that Country A can produce either 20 units of wheat or 10 units of wine in an hour, and Country B can produce either 15 units of wheat or 15 units of wine in an hour. The opportunity cost of producing one unit of wheat for Country A is half a unit of wine, and the opportunity cost of producing one unit of wine for Country A is two units of wheat. The opportunity cost of producing one unit of wheat for Country B is one unit of wine, and the opportunity cost of producing one unit of wine for Country B is one unit of wheat. Therefore, Country A has a comparative advantage in producing wheat, and Country B has a comparative advantage in producing wine.

3 How to use comparative advantage to trade?

Using comparative advantage to trade means that each country or region should specialize in producing the good or service that it has a comparative advantage in, and then exchange it for the good or service that it has a comparative disadvantage in. This way, both parties can increase their total output and consumption, and achieve a higher level of welfare. For example, suppose that Country A and Country B decide to trade based on their comparative advantage. Country A produces 20 units of wheat and trades 10 units of wheat for 10 units of wine with Country B. Country B produces 15 units of wine and trades 10 units of wine for 10 units of wheat with Country A. As a result, both countries end up with 10 units of wheat and 10 units of wine, which is more than what they could produce and consume without trade.

4 How to use comparative advantage to compete?

Using comparative advantage to compete means that you should focus on producing and selling the good or service that you have a comparative advantage in, and avoid competing with others who have a comparative advantage in a different good or service. This way, you can differentiate yourself from your rivals, create value for your customers, and increase your market share and profitability. For example, suppose that you are a software developer who can create either web applications or mobile applications. You have a comparative advantage in creating web applications because you can produce them faster and cheaper than your competitors. However, you have a comparative disadvantage in creating mobile applications because you lack the skills and resources to do so efficiently. Therefore, you should use your comparative advantage to compete in the web application market, and avoid entering the mobile application market where you would face stronger competition.

5 How to use comparative advantage to innovate?

Using comparative advantage to innovate means that you should leverage your existing strengths and resources to create new or improved goods or services that can meet the changing needs and preferences of your customers. This way, you can maintain or enhance your competitive edge, expand your customer base, and generate new revenue streams. For example, suppose that you are a coffee producer who has a comparative advantage in growing high-quality coffee beans. You can use your comparative advantage to innovate by developing new varieties of coffee beans, roasting techniques, or packaging methods that can appeal to different segments of the coffee market. Alternatively, you can use your comparative advantage to innovate by creating new products or services that are related to coffee, such as coffee machines, coffee accessories, or coffee education.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?