Comparative advantage is a lower sacrifice of alternative output.
A country has comparative advantage in a good when producing it has a lower opportunity cost than in another country. Absolute advantage concerns producing more with given resources, or using fewer resources for an output; it does not by itself identify comparative advantage. In a two-good comparison, a country can be more productive in both goods while its relative advantage is greater in one. Concentrating resources towards activities with lower opportunity costs can increase the combined output available. Voluntary trade on suitable terms can then let both countries consume a preferred combination. Transport costs, adjustment barriers and changing costs can limit the gain; complete specialisation is not a universal prescription.
- Comparative advantage
- A country has comparative advantage when it gives up less alternative output to produce a good. That sacrifice is its opportunity cost: compare what each country forgoes, not just selling prices or wages.
- Absolute advantage
- Absolute advantage means producing more with the same resources, or using fewer resources for the same output. One country can have this advantage in both goods and still gain from trade.
- Specialisation and exchange
- Specialisation shifts resources towards particular activities. It can increase combined production when countries focus on lower-opportunity-cost goods, but the trading terms and costs must make exchange worthwhile.
State the assumptions behind a gain
Relative sacrifice
Use the other good forgone, not merely a low selling price, low wage or large output.
Trading costs
Free trade means trade without protectionist barriers such as tariffs or import quotas. Transport, compliance and search costs can still remain and use part or all of the potential gain.
Adjustment and change
Resources may not move immediately; skills, capital and technology can alter comparative advantage over time. Static gains do not guarantee every worker benefits.
Scope
A qualitative opportunity-cost explanation is required. Numerical comparative-advantage schedules are not required in the 2026 H2 syllabus.
Worked example: More productive in both, but still able to trade
Country A is more productive in both instruments and textiles. Its productivity lead is especially large in instruments; Country B gives up relatively fewer instruments when it produces textiles. Assume demand for both goods and manageable trading costs.
- B has comparative advantage in textiles because its sacrifice of instruments is relatively smaller.
- A has comparative advantage in instruments in this two-good comparison, even though it also has absolute advantage in textiles.
- Shifting production towards these comparative advantages can increase what the two countries can jointly obtain.
- Trade must offer a better exchange than each country's own production alternative after trading costs; workers may still need help moving between activities.
Watch out for this
A country with no absolute advantage cannot gain from trade.
Relative opportunity costs can differ even when one country is more productive in both goods.
Check your understanding
What identifies comparative advantage?
- The highest money wage.
- The largest total output.
- The lower opportunity cost of the good.