Comparative vs Competitive Advantage
Both concepts of comparative and competitive advantage play a major part in decisions made by countries as to which of their produce will be exported. Whether the country has a competitive or comparative advantage will influence its decision making, ensuring that goods exported will result in higher levels of profit and lower opportunity cost. These concepts are different to each other even though comparative advantage is also a form of competitive advantage. As these terms are easily confused by many, the following article aims to resolve this confusion with a clear explanation of the two concepts.
What is Comparative Advantage?
Comparative advantage is when a company can produce goods at a lower opportunity cost than its competitors. Opportunity cost is the cost that must be endured when selecting one option over the other. For example, the opportunity cost of spending money to go to university would be the time that you could have used to do something else and money that you would have lost by not being able to work. By understanding the opportunity cost, comparative advantage explains the concept of when a company has a low opportunity cost and less to lose by choosing one option. For example, Saudi Arabia and China produces diesel oil. Saudi Arabia has an advantage of having easy access to oil, whereas China needs to import its oil from the Middle East for diesel production. Of these two countries clearly Saudi Arabia has a comparative advantage over China.
What is Competitive Advantage?
Competitive advantage represents any benefits and advantages that a company may have over its competitors. This could include things like having a low cost structure, low cost of labor, better access to raw materials, etc. However, it must be noted that comparative advantage is a form of competitive advantage as having a comparative advantage would no doubt bring the company many competitive benefits. The importance of competitive advantage is that it brings about a number of benefits for the firm over its rivals so that they may improve profitability and with lower cost.
Comparative vs Competitive Advantage
Comparative and competitive advantage are similar to each other in that comparative advantage is a component of competitive advantage, and both these comparative and competitive advantage play an important role in decision making. Comparative advantage explains how a firm may benefit because of the lower opportunity cost it has from selecting one alternative over the other. On the other hand, competitive advantage explains how a company may benefit by having a distinctive advantage over its rivals allowing them to produce at a lower cost and improve profitability.
Summary:
Difference Between Comparative Advantage and Competitive Advantage
• Both concepts of comparative and competitive advantage play a major part in decisions made by countries as to which of their produce will be exported.
• Comparative advantage is when a company can produce goods at a lower opportunity cost than its competitors. Opportunity cost is the cost that must be endured when selecting one option over the other.
• Competitive advantage represents any benefits and advantages that a company may have over its competitors. This could include things like having a low cost structure, low cost of labor, better access to raw materials, etc.