Absolute Advantage vs Comparative Advantage

Differences Between Absolute and Comparative Advantage

Absolute Advantage is the ability with which an increased number of goods and services can be produced and that too at a better quality as compared to competitors whereas Comparative Advantage signifies the ability to manufacture goods or services at a relatively lower opportunity cost.

In International trade, absolute advantage and comparative advantage are widely used terms. These advantages influence the decisions taken by the countries to devout their natural resources and produce specific goods.

Absolute Advantage

Absolute advantage is when a country can produce particular goods at a lower cost than another country.

Few examples are:

  • It is easier to extract oil in Saudi Arabia than in any other country. The abundance of oil in Saudi Arabia makes it easier as if it’s only drilling an oil whereas for other countries it involves exploration and drilling cost.
  • Colombia has the climatic advantage of producing coffee. Thus, it can produce coffee at a lower cost than other countries

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Absolute Advantage vs Comparative Advantage (wallstreetmojo.com)

Comparative Advantage

Comparative advantageComparative AdvantageIn order to determine comparative advantage, the opportunity cost of each item from each country needs to be calculated. Then, on a comparative table, these costs are plotted to get the comparative advantage.read more is based on the opportunity cost of producing a good. If a Country can produce a particular good at a lower opportunity cost (by losing an opportunity for the production of other goods) than any other country then it is said to have a comparative advantage.

Few examples of comparative advantage are:

  • If the US and Japan have an option to produce wheat or rice but not both. The US could produce 30 units of wheat or 10 units of rice and Japan can produce 15 units of wheat or 30 units of rice. Thus, the opportunity cost of wheat is 3 units of wheat for 1 unit of rice for the US whereas 0.5 units of wheat for each unit of rice for Japan. Thus, Japan has a comparative advantage in the production of rice since it has a lower opportunity cost.

Absolute Advantage vs Comparative Advantage Infographics

Let’s see the top differences between absolute vs comparative advantages.

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Absolute Advantage vs Comparative Advantage (wallstreetmojo.com)

Key Differences

  • A country has an absolute advantage if it produces a large number of goods with the same resources as provided to another country whereas the country has a comparative advantage if the Country can produce a particular product with better quality at a cheaper price than another country.
  • There is no mutual benefit in trade-in absolute advantage whereas the trade is mutually benefitted with comparative advantage. This is because the Country which has a higher opportunity cost of producing a good can now receive it at a lower cost from the production of another country.
  • Cost is a factor to determine if the country has an absolute advantage whereas opportunity cost is a factor which determines if the country has a comparative advantage
  • Comparative advantage is mutual and reciprocal whereas absolute advantage is not.

Absolute vs Comparative Advantage Comparative Table

BasisAbsolute AdvantageComparative Advantage
DefinitionThe ability of a country to produce more goods with the same amount of resources than another countryThe ability of the country to produce good better than another country with the same amount of resources
Benefits1. Trade is not mutually beneficial
2. Benefits the Country with absolute advantage
1. Trade is mutually beneficial
2.Benefits of both the countries
CostThe absolute cost of producing goods impacts if the country has an absolute advantageThe opportunity cost of producing goods impact the Country’s comparative advantage
Economic NatureIt is not mutual and reciprocalIt is mutual and reciprocal

Example

Consider two countries A and B which have the following dynamics for the production of maize and corn. The output for an equal number of resources per day is as below:

MaizeCorn
Country A3015
Country B510
  • For Country A the opportunity cost of producing 15 units of corn is 30 units of Maize or we can say Country A has an opportunity cost of producing 1 unit of corn to 2 units of maize. Similarly, country B has the opportunity cost of producing 1 unit of corn to 0.5 units of Maize. Since the opportunity cost of producing corn in country B is less, it has a comparative advantage.
  • Similarly, Country A has an opportunity cost of 0.5 units corn to produce 1 unit of maize, and country B has an opportunity cost of 2 units of corn to produce 1 unit of maize. Thus, country A has a comparative advantage over Country B in the production of Maize. However, since Country A can produce both corn and maize higher than Country B, it has an absolute advantage.
  • Thus, if Country A produces and trades Maize while country B produces and trades Corn both the countries will benefit from the trade with lower opportunity costs and higher efficiency.
  • In the above example, we have seen that even if A has an absolute advantage in producing all the goods a different country can have a different comparative advantage. Comparative advantage helps the countries to decide which goods they should produce and drive the trade. Comparative advantage drives specialization in the production of a good in a country as they have a lower opportunity cost and thus leads to higher production and better efficiency.

Conclusion

It should be understood that while the theoretical differences between absolute and comparative advantage are easy to understand but practically it is more complex. No nation has an advantage in the production of each good also no nation has exclusivity overproduction of goods. There are many factors which drive the manufacturing and production of goods which make the production of certain goods more efficient in some nations. A nation can produce some goods efficiently but may not be able to transport and market them in other countries. Hence, these both could be better understood when countries have equal resources.

Video on Absolute Advantage vs Comparative Advantage

 

Recommended Articles

This has been a guide to the Absolute Advantage vs Comparative Advantage. Here we discuss the top differences between Absolute and Comparative Advantage along with infographics and comparative table. You may also have a look at the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *