David Ricardo’s concept of comparative advantage is an important premise in international trade theory because it explains how and why countries trade, even when one country can produce all things more effectively than another.
Furthermore, comparative advantage is defined as the advantage that occurs when a country can produce a good or service at a lower opportunity cost than another country. Opportunity cost is the value of the next best alternative forgone when making a decision. Therefore, even if one country is efficient at producing all goods (absolute disadvantage), it can still benefit from trade by specializing in the production of goods for which it has a comparative advantage.
Hence, it is possible to identify crucial points based on the theory of comparative advantage. The first is called opportunity cost. Opportunity costs are at the heart of the comparative advantage idea. A country should focus on producing goods with the lowest opportunity cost when compared to others. The second step is specialization, which states that countries can increase their overall efficiency and production by focusing on specific products. This specialization enables countries to produce more than they could if they attempted to manufacture everything alone. He also offers a third concept, termed reciprocal benefits.
Third, he presents the idea of mutual benefits, which states that when nations trade according to their comparative advantages, both can benefit from increased total output and consumption possibilities. This means that even if one nation has an absolute advantage in producing everything, both can still benefit from trade. Finally, but just as importantly, his theory explains how countries trade with one another. Countries exporting and importing goods in which they have a comparative disadvantage.
The ideal illustration of comparative advantage may be two countries, Country A and Country B, producing two goods: cellphones and cars.
- Country A can produce: 10 units of cellphone or 5 units of car.
- Country B can produce: 6 units of cellphone or 4 units of car.
Opportunity Costs:
- For Country A:
- The opportunity cost of producing 1 unit of cellphone is 0.5 units of car (5 cars / 10 cellphones).
- The opportunity cost of producing 1 unit of car is 2 units of cellphone (10 cellphones / 5 cars).
- For Country B:
- The opportunity cost of producing 1 unit of cellphone is 0.67 units of car (4 cars / 6 cellphones).
- The opportunity cost of producing 1 unit of car is 1.5 units of cellphones (6 cellphones / 4 cars).
In this case, Country A has a comparative advantage in manufacturing smartphones (lower opportunity cost), whereas Country B has a comparative advantage in producing cars. Hence, if they produce based on their comparative advantages and engage in trade, they can benefit from their specializations.
Therefore, Ricardo’s theory of comparative advantage continues to be a fundamental component of contemporary economics and offers a compelling case for international free trade by illustrating how specialization and exchange can result in mutual advantages and greater well-being.
Here, applying Ricardo’s idea to Ethiopia’s trade and investment prospects is crucial in this case. Ethiopia has a number of comparative advantages that might be used to further international commerce and economic growth. These benefits come from its labor force, agricultural potential, natural resources, and strategic position.
To elaborate more, Ethiopia has a huge and reasonably priced workforce. This can be beneficial for any sectors that demand labor-intensive production, such as industrial parks that manufacture electric automobiles. The government has been supporting the establishment of industrial parks to attract foreign investment in the manufacturing sector.
Another area in which Ethiopia may have a comparative advantage is in its natural resources. The country has an abundance of natural resources, particularly water, which can be utilized for hydropower. Utilizing Ethiopia’s substantial hydropower potential, electricity can be produced both domestically and exported to nearby countries.
Due to its comparative advantages and potential, Ethiopia is encouraging the usage of electric vehicles (EVs). EVs are superior to conventional fuel-powered vehicles (also known as internal combustion engine, or ICE) in several ways and it brings comparative advantage to the country.
One example is the country’s annual expenditure on fuel. Ethiopia spends more than 4 billion dollars on fuel purchases. But an electric vehicle (EV) can travel 200–240 km on average when fully charged, and it costs no more than 20 Birr for electric services. In contrast, fuel-powered vehicles need to use an average of 20 liters of fuel, which is expensive. Due to this potential, investors are drawn to Ethiopia to take Ethiopia’s comparative advantages by manufacturing EVs.
According to the Ethiopian Ministry of Transport and Logistics, international electric car manufacturers and suppliers are interested in providing and investing in Ethiopia. The number of companies in Ethiopia that manufacture and supply electric automobiles is also increasing year after year.
Bareo Hassen, the State Minister of Transport and Logistics, stated that while initiatives are underway to promote electric vehicles in the country and raise investment in the industry, the number of firms in Ethiopia that produce and supply electric automobiles is expanding year after year.
He mentioned that Ethiopia has launched encouraging measures aimed at decreasing reliance on fossil fuels and enabling the transport and logistics sector to leverage the nation’s potential renewable energy resources. In this context, the state minister indicated that efforts are being made to expedite the execution of the National Electric Vehicle Strategy and to render it appealing for investment.
Additionally, he revealed that the government is supporting initiatives focused on converting vehicles powered by fossil fuels to electric alternatives, as well as on technologies that aim to minimize fuel consumption and pollution.
Bareo additionally noted that a range of incentives for investors engaged in the sector has been established through policies and strategies that are yielding favorable outcomes.
He pointed out that the current count of electric vehicles in the country surpasses 115,000, and the number of companies assembling electric vehicles has exceeded 15.
The state minister further indicated that due to the focus Ethiopia has placed on the sector, numerous international electric vehicle manufacturers and suppliers are now expressing significant interest in investing in this sector.
In general, Ethiopia’s comparative advantages are mostly based on its potential, which includes natural resources, a skilled labor force, and a strategic location. By focusing on these sectors, Ethiopia can attract international investment, boosting economic growth and improving the lives of its people. Furthermore, Ethiopia has vast renewable energy resources, including hydroelectric, wind, and solar power. Producing or assembling EVs gives access to these energy sources, reducing dependency on fossil fuels and lowering greenhouse gas emissions.
Furthermore, the expansion of electric vehicle manufacturing in Ethiopia has the potential to generate considerable economic benefits, such as job creation, technological advances, environmental protection, and greater investment. Therefore, Ethiopia should leverage its comparative advantages in EVs production to diversify its economy, which has traditionally been highly reliant on agriculture. A more diverse economy can increase resilience to economic shocks.
BY EPHREM ANDARAGCHEW
THE ETHIOPIAN HERALD SUNDAY EDITION 20, July 2025
