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comparative advantage |
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The principle where-by individuals (or territories) produce those goods or services for which they have the greatest cost or efficiency advantage over others, or for which they have the least disadvantage. The outcome tends to be specialization. A gifted individual or resource-rich region may be able to produce everything more efficiently than others less well-endowed, but as long as some comparative advantage exists specialization may benefit all. An example is that of the best lawyer in town who is also the best typist: it pays the lawyer to concentrate on the lucrative practice of the law and to hire a typist (who has a comparative advantage in typing relative to knowledge of the law). One region may be able to produce two goods more efficiently than another region, but it pays to concentrate on the good for which there is greatest comparative advantage and buy the other from the second region.
The notion of comparative advantage is important in understanding regional specialization, whereby all regions gain from the interchange of products even if they could satisfy their own needs. A condition for realizing the benefits of comparative advantage is free trade. At the international scale, market imperfections such as tariff barriers to free trade can impede specialization based on comparative advantage, protecting domestic production of goods which could not withstand open competition. The objective may be to ensure more \'balanced\' economic development and to avoid problems associated with narrow product specialization. (DMS) |
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