Absolute vs Comparative Advantage
If you do any reading in the field of international trade, you will come across the terms “absolute advantage” and “comparative advantage”. Sometimes the manner in which they are used seems to be a bit confusing and leaves readers to conclude that they are synonymous, but they are not. There are definite differences in the definitions of absolute and comparative advantage.
What is absolute advantage?
When a person or a business can produce a product more cheaply than any others, then this is said to be an absolute advantage. There are inherent problems in this definition because any number of factors can affect the cost of production. For example, labour costs are much cheaper in many countries than they are in North America. It really refers to the fact that the comparison of cost includes the same resources and this includes the cost of hiring workers. If there is only one country producing a specific product then it would be impossible to establish trade that would be of mutual benefit to the importing and exporting countries.
If you look at copper production in the world, you can easily see how Zambia has an absolute advantage over other countries that do produce copper as well. This is because Zambia has the world’s largest deposits of copper in its raw material known as bauxite.
Therefore the correct definition of absolute advantage would refer to a country that can produce a product cheaper than another country when all factors involved are the same. This concept dates back to Adam Smith when he wrote about international trade.
What is comparative advantage?
Comparative advantage is also a term of great importance in international trade. When a country can produce a product at a lower opportunity cost than other countries, then it is said to be at a comparative advantage. Opportunity cost means that you look at what would be the best economic advantage for the country. An easier way to explain this may be to look at what the country needs and what it can produce. If it is more expensive to produce something that is needed but cheaper to produce a product that it can sell at home and abroad then the opportunity cost is to forego the needed product for the one that will sell.
This concept was first developed by Robert Torrens in 1815. In essence it means that a country would produce a product that it can do so very economically and only import the products that it needs but finds too expensive to produce.
Absolute advantage refers to a concept in which a country can produce a product cheaper than any other country. Comparative advantage refers to a concept in which a country can produce a better product than any other country.
Comparative advantage lends itself to international trade, but absolute advantage does not.
One of the factors that have to be taken into consideration in comparative advantage is that of opportunity cost. It refers to the cost that has to be sacrificed in order to produce a product that will result in comparative advantage.