Measuring Comparative Advantage

Abstract

The principle of comparative advantage has significant implications for the efficiency of resource allocation and economic growth. The term ‘comparative advantage’ is often used interchangeably with ‘comparative cost’ which is closely associated with the term ‘opportunity cost’. The opportunity cost of a commodity is the value of other commodities which must be forgone so that one extra unit of a commodity may be obtained. This is equivalent to what is expressed in the literature of comparative advantage as ‘relative price’—that is, the quantity of some commodity that must be given up in exchange for one unit of another commodity. In the classical case, the comparative advantage in a commodity is defined by the divergence between its autarkic and free trade relative prices.