Main Difference – Absolute vs Comparative Advantage
International trade is an increasingly important economic phenomenon, in today’s dynamic and competitive business world. Absolute advantage and comparative advantage are two important theories in economics developed by Adam Smith. They explain how the limited resources of a particular nation can be used to produce goods and services. Absolute Advantage describes the ability of a specific country to produce goods at a lower cost per unit whereas comparative advantage describes the ability of a specific country to produce goods at a lower opportunity cost. This is the main difference between absolute and comparative advantage. By having a better understanding of the theory of absolute advantage and comparative advantage, economic entities can make more productive decisions in the market.
This article looks at,
1. What is Absolute Advantage? – Definition, Features, and Characteristics
2. What is Comparative Advantage? – Definition, Features, and Characteristics
3. What is the difference between Absolute and Comparative Advantage?
What is Absolute Advantage
If a particular nation / entity can produce goods and services at a lesser cost per unit compared to the cost if it is produced by another nation, that country has the absolute advantage over producing that good or service. In other words, the country that has absolute advantage can produce the products using lesser number of inputs or with highly efficient processes.
What is Comparative Advantage
Theory of comparative advantage refers to the ability of a given nation to produce goods and services, not at a lower cost per unit, but at a lower opportunity cost compared to the other nations. The lower opportunity cost can be described as the ability of a nation to specialize in producing a particular good or service from a limited amount of resources. Opportunity cost is simply the benefits that are sacrificed as a result of making one selection. Therefore, if the opportunity cost of producing a good is lower compared to the nation’s opportunity cost of producing the same product with same resources, that country has comparative advantages of producing that product.
Similarities Between Absolute and Comparative Advantage
- Both theories deal with production of goods and services between two or more nations
Difference Between Absolute and Comparative Advantage
Absolute Advantage: Absolute advantage describes the ability of a specific country to produce goods at a lower cost per unit
Comparative Advantage: Comparative advantage describes the ability of a specific country to produce goods at a lower opportunity cost.
Absolute Advantage: Trading is not mutually beneficial for two countries.
Comparative Advantage: Trading is mutually beneficial for two countries.
Absolute Advantage: A country with absolute advantage produces a higher volume of goods with the given amount of resources.
Comparative Advantage: A country with comparative advantage produces goods better than another nation with the same amount of resources.
Comparative Advantage: Absolute advantage considers advantage of producing numerous goods.
Comparative Advantage: Comparative advantage considers overall production of a nation during a given time frame
Absolute vs. Comparative Advantage – Conclusion
Absolute advantage and comparative advantage are two different economic contexts that mainly deal with the decision of how a particular nation can get advantages over their unique production fortes in international trade. If a particular nation produces goods at a lower cost, that country enjoys absolute advantages of trade, whilst if a particular nation produces goods at a lower opportunity cost, that country enjoys a comparative advantage. By understanding these models, countries can specialize in producing certain goods and services and can achieve mutual benefits from international trade.