What does the term comparative advantage refer to?

The term comparative advantage refers to the ability of a business, individual, or country to produce a particular good or service at a lower opportunity cost than its competitors. It highlights that even if one entity is more efficient in producing all goods, they can still maximize their overall output by specializing in the production of goods where they hold the relative efficiency. This principle encourages specialization and trade, allowing all parties to benefit by exchanging goods in which they have a comparative advantage.

The focus is on opportunity costs, which means that the advantage is not just about being cheaper in all respects; instead, it's about being relatively more efficient in producing certain goods compared to others. This approach is fundamental to international trade, as it explains why countries engage in trade and how they can benefit from it by concentrating on their strengths.