Absolute advantage and Comparative advantage are two words that are often encountered in economics, especially international trade. People are often confused between the differences between the two concepts and look for clarifications. This article tries to make the two concepts clear by highlighting the difference between absolute and comparative advantage.
Absolute advantage
Advantage refers to a situation when a person, group or a nation can produce a particular product with more economy than others. Of course this statement is very general as there can be labor advantage (labor could be cheap or inexpensive), or capital advantage. Absolute advantage is a term that is used when one country can produce more number of a particular item with same resources than any other country. If this particular item is produced by only one country, then mutually beneficial trade is impossible.
Taking an example, it can be said that Zambia is a country that has an absolute advantage over other countries as far as copper production is concerned. This is because of a natural phenomenon as the country has the largest reserves of copper or its oxide known as Bauxite.
So, absolute advantage is a situation that occurs when a nation is able to produce some goods at a cost lower to other countries with all other factors being equal. The concept of absolute advantage was propounded by Adam smith when talking about international trade.
Comparative advantage
The concept of comparative advantage is of great significance in international trade. A country is said to have comparative advantage over other countries if it is producing goods and services at a lower opportunity cost. Opportunity cost of a particular item is defined as the amount that is sacrificed to make another unit of that particular item. This theory suggests that if a country has an advantage over other countries in the production of some goods and services, it should confine itself in producing these goods and services only and should import other goods and services in which the country is inefficient. The theory of comparative advantage was first explained by Robert Torrens in 1815.
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Summary • Absolute advantage is the advantage of one country over another if it can produce higher number of goods with the same resources than other countries. On the other hand, comparative advantage is the ability of a country to make a particular item better than other countries. • Under absolute advantage, mutually beneficial trade is not possible, comparative advantage provides for mutually beneficial trade between countries. • Opportunity cost is a factor that is taken into consideration when talking about comparative advantage, while it is only cost that is a factor when absolute advantage is talked about. |