What Is the Relationship between Specialization and Comparative Advantage?
Specialization and comparative advantage are separate but related concepts. Comparative advantage refers to a situation in which two entities may produce similar products, yet one entity might have an advantage over the other due to lower production costs or other identified factors. Specialization refers to a situation in which an entity chooses to focus on the production of an item due to several perceived benefits and advantages. As such, specialization and comparative advantage are related because a company that has a comparative advantage in the production of a certain item may choose to specialize in the production of that item.
An illustration of specialization and comparative advantage can be seen in a case where two companies located in different countries produce similar items. Assuming the item is orange juice and country A produces vast quantities of oranges while country B has to augment its weaker production with imported oranges, then, the company in country A has the comparative advantage. The reason why the company in country A has the comparative advantage is because it can produce the oranges at a cheaper cost than can the company is located in country B.
In this sense, the company in country A could decide to specialize in the production of orange juice since it has the comparative advantage due to easy access to raw materials. This cuts down on expenditure and logistics related to importing oranges. The relationship between specialization and comparative advantage is mainly due to the fact that specialization could be the natural consequence of an identified comparative advantage.
Another way of identifying a comparative advantage is by analyzing the opportunity cost for the production of a commodity. For instance, if ACB company and XYZ company both produce body lotion and body powder, the company that has the comparative advantage over the other can be found through an analysis of the opportunity cost for producing the two items. If ABC produces body lotion at $12 per jar, and produces body powder for $3 per jar, then the opportunity cost for producing body lotion is $9 or three jars of powder. If XYZ produces the body lotion at $10 and the powder at $5, then its opportunity cost for producing the body lotion is $5, or one jar of powder. Clearly, ABC should have comparative advantage in the production of powder and should specialize in this production, while XYZ should specialize in the production of body lotion.
A follow up to my earlier post. The orange juice example seems more like absolute advantage. The lotion example is comparative advantage.
This article seems to mix up comparative advantage with absolute advantage.
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