Comparative advantage
Being able to do something at a lower opportunity cost than others, not necessarily at a lower absolute cost. It decides who should specialise in what — and, in risk management, who should bear a risk.
Where you will meet it
Comparative advantage appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Set out ways to change a portfolio's exposure to risk
“Choosing between them turns on cost and on whether the organisation has comparative advantage in bearing the risk.”
- Set out the gains from international trade and what it costs
“Trade allows countries to specialise where they have a comparative advantage — the lowest opportunity cost, not necessarily the lowest absolute cost — which raises total output and lowers prices.”
- Set out what dropping trade barriers is likely to do to capital investment and profits, to jobs and wages, and to growth in each economy concerned
“Removing trade barriers raises growth through specialisation by comparative advantage, larger markets with economies of scale, cheaper inputs, the spread of technology and competition that forces efficiency.”
See also
Practise it
Practise comparative advantage until it is automatic: questions that explain every wrong option.
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