Comparative advantage

Comparative Advantage refers to the ability of an entity (individual, company, or country) to produce a good or service at a lower opportunity cost than another one. It is the ability to produce a product with an highest relative efficiency than one's trade partner, given all the other products that could be produced. It can be contrasted with Absolute Advantage which refers to the ability of one to produce a particular good or service at a lower absolute cost than another. For example, if country A can produce 50 cars or 1000 watches and country B can produce 200 cars or 2000 watches, it maximizes aggregate production if country A produce watches and country B produce cars, allowing for consumptions to jump from A (25, 500) and B (100, 1000) to, for example:

No trade) A (0, 1000) and B (150, 500)
1) A (50, 500) and B (100, 1000) - B sells 50 cars for 500 watches
2) A (25, 500) and B (125, 1000) - B sells 25 cars for 500 watches

Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade.