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COMPARATIVE ADVANTAGE REACTION PAPER

When a certain economy has the ability to produce a particular good or service at a lower

opportunity cost than other trading partners is called Comparative Advantage. It was popularized

by an English political economist, David Ricardo in his book “On the Principles of political

economy and taxation”. According to Ricardo, it occurs when a country can produce a good or

service at a lower opportunity cost than another country. Here are some of the takeaways that

I’ve learned based on the reading material, First, comparative advantage suggests that countries

will engage in trade with one another, exporting the goods that they have a relative advantage in.

For example, Saudi Arabia has comparative advantage in producing oils than Japan since that

have more ability to produce it than Japan in a lower price. Second, comparative advantage gives

the company the ability to sell goods and services at a lower price than its competitors and

realize stronger sales margins. Third, to better understand about comparative advantage you can

take it as for example if you are given choices between trade-off, the one with the best option has

the comparative advantage. Like having a lower price than the other choice, or the one with the

best packaging has the comparative advantage. Fourth, the theory of comparative advantage

introduces opportunity cost as a factor for analysis in choosing between different options for

production. Opportunity costs represent the potential benefits an individual, investor or business

misses out on when choosing one alternative over another. And lastly, comparative advantage is

one of the most significant concepts in economics and it is the foundation principle of

international trade. Every nation must focus on producing goods using an efficient and effective

process for them to have comparative advantage towards other trading nations.