Absolute
Advantage versus Comparative Advantage -
Absolute advantage
refers to differences in productivity of nations, while comparative advantage
refers to differences in opportunity costs.
Absolute Advantage
Absolute advantage compares the productivity of
different producers or economies. The producer that requires a smaller quantity
inputs to produce a good is said to have an absolute advantage in producing
that good.
Table 1 shows the amount of output Country
A and Country B can produce in a given period of time. Country A uses less time
than Country B to make either food or clothing. Country A makes 6 units of food
while Country B makes one unit, and Country A makes three units of clothing
while Country B makes two. In other words, Country A has an absolute advantage
in making both food and clothing.
TABLE 1
Country
A has an absolute advantage in making both food and clothing, but a comparative
advantage only in food.
Comparative Advantage
Comparative advantage refers
to the ability of a party to produce a particular good or service at a lower
opportunity cost than another. Even if one country has an absolute advantage in
producing all goods, different countries could still have different comparative
advantages. If one country has a comparative advantage over another, both
parties can benefit from trading because each party will receive a good at a
price that is lower than its own opportunity cost of producing that good.
Comparative advantage drives countries to specialize in the production of the
goods for which they have the lowest opportunity cost, which leads to increased
productivity.
For example, consider
again Country A and Country B in table 1. The opportunity cost of producing 1
unit of clothing is 2 units of food in Country A, but only 0.5 units of food in
Country B. Since the opportunity cost of producing clothing is lower in Country
B than in Country A, Country B has a comparative advantage in clothing.
Thus, even though Country A has an absolute advantage in both food
and clothes, it will specialize in food while Country B specializes clothing.
The countries will then trade, and
each will gain.
Absolute advantage
important, but comparative advantage is what determines what a country will
specialize in.
SUMMARY
• The producer that requires a smaller
quantity inputs to produce a good is said to have an absolute advantage in
producing that good.
• Comparative advantage refers to the
ability of a party to produce a particular good or service at a lower
opportunity cost than another.
• The existence of a comparative
advantage allows both parties to benefit from trading, because each party will
receive a good at a price that is lower than its opportunity cost of producing
that good.
• Comparative advantage
The ability of a party
to produce a particular good or service at a lower marginal and opportunity
cost over another.
• Absolute advantage
The capability to
produce more of a given product using less of a given resource than a competing
entity.
