In: Economics
What is the difference between competitive advantage and comparative advantage? How does each influence what a country produces, what it exports and imports? What happens if one country (or person) has an absolute advantage in production of all products or services? Does that mean there are no gains from trade? Explain.
The main difference between competitive advantage and comparative advantage is based on the opportunity cost. Competitive advantage refers to something that will help the company to be on top of the competition. It may or may not be opportunity cost. But comparative advantage completely depends on opportunity cost and it refers to the ability of the company to produce goods or service at a lower opportunity cost than the others.
There are many attributes for competitive advantage including brand, quality, cost and customer support and it helps to provide more value for the firm. The superior qualities of the product help to generate more sales and export more products. Countries export products for which they possess competitive advantage and import products for which they lack competitive advantage. The comparative advantage helps the companies to make profit by specializing in production of the goods for which the opportunity cost is lower and produce at a larger quantity to make profit by importing the same. Absolute advantage refers to the ability of the country to produce goods more efficiently than others and when the country has absolute advantage over all the products it can produce all of them efficiently. But the opportunity cost may differ for different products which provide comparative advantage for each. Even if one country has an absolute advantage in production of all products or services, both the countries can gain from trading based on the comparative advantage. The countries can make profit by importing goods for which the opportunity cost of importing is lower than that of producing them in domestic market and exporting the goods that have lower opportunity cost for producing them locally.