Comperative adavantage

In economics, comparative advantage refers to the ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. Even if one country is more efficient in the production of all goods (has an absolute advantage in all goods) than another, both countries will still gain by trading with each other. More specifically, countries should import goods if the opportunity cost of importing is lower than the cost of producing them locally.

Specialization according to comparative advantage results in a more efficient allocation of world resources. Larger outputs of both products become available to both nations. The outcome of international specialization and trade is equivalent to a nation having more and/or better resources or discovering improved production techniques.
Determining Comparative Advantage

Imagine that there are two Countries, Country A and Country B, that currently produce their own Sugar and Milk .  Country A uses less time to produce both products, while Country B uses more time to produce both products.  Country A enjoys and absolute advantage, an ability to produce an item with fewer resources. However, the accompanying table shows that  Country A has a comparative advantage in Sugar production, while Country B has a comparative advantage in the production of Milk. The nations can benefit from specialization and trade, which would make the allocation of resources more efficient across both countries.
Country A has a comparative advantage in producing Sugar , while Country B has a comparative advantage in producing Milk. Both nations can benefit from trade.



 

	Production without Trade
	Product	Country A	Country B
	Sugar	5 Hours	24 Hours
	Milk	10 Hours	12 Hours
	Total	15 Hours	36 Hours
	Opportunity cost of production
	Product	Country A	Country B
	Sugar	0.5 Litres	2 Litres
	Milk	2 Kg	0.5 Kg
	Production with Trade
	Country A			Country B
	1 Kg sugar	5 Hours	1 Litre	12 Hours
	1 Kg sugar	5 Hours	1 Litre	12 Hours
	Total	10 Hours		24 Hours

For another example, if the opportunity cost of producing one more unit of coffee in Kenya is 2/3 units of wheat, while the opportunity cost of producing one more unit of coffee in the United States is 1/3 wheat, then the U.S. should produce coffee, while Kenya should produce wheat (assuming Kenya has the lower opportunity cost of producing wheat).
Comparative vs Competitive Advantage

It is important to distinguish between comparative advantage and competitive advantage. Though they sound similar, they are different concepts. Unlike comparative advantage, competitive advantage refers to a distinguishing attribute of a company or a product. It may or may not have anything to do with opportunity cost or efficiency. For example, having good brand recognition or relationships with suppliers is a competitive advantage, but not a comparative advantage. In the context of international trade, we more often discuss comparative advantage.