Comparative advantage vs absolute advantage in Economics

Say two countries, Japan and the US, are good at producing cars. However, Japan produces quality cars at a faster rate. In this scenario, Japan is said to have an absolute advantage in the production of cars. The absolute advantage or disadvantage of a country influences the goods they choose to import and those they prefer to produce locally. In the above example, the US might decide to import cars from Japan and concentrate their resources on another industry.

Comparative Advantage

When a country devotes its resources in the production of a given good, it is said to have specialized. In economics, specialization refers to improvement in productive skill gained from producing a given good consistently. For a country, specialization starts when a majority of the citizens concentrate their labor efforts in the production of a limited variety of goods.

A nation chooses goods to specialize based on its comparative advantage. While absolute advantage is when a nation can produce goods of superior quality faster than other countries, comparative advantage is based on opportunity cost. Opportunity cost is referred to as the benefits lost when one alternative is chosen over another. If the opportunity cost of producing a given cost is lower for a given nation than for others, that nation is said to hold a comparative advantage.

Say two countries can produce wine or cheese but not both. The states will need to assess their ability to produce each of the items. If a country earns $2.4 million producing wine and $3.5 producing cheese in a month, then the opportunity cost of cheese is lower than that of wine. Such a country should devote resources to producing cheese.

The History of Comparative and Absolute Advantage

Adam Smith, who is considered the father of economics, was the first to recommend specialization for countries. In his book, 'An Inquiry into the Nature and Causes of the Wealth of Nations,' Smith recommends that countries need to specialize in goods they can efficiently produce and import those they cannot produce efficiently.

Smith took a more in-depth look at specialization and international trade and related them to absolute advantage. For instance, Spain can produce more wine per labor hour than in England. England, on the other hand, can produce more textiles per labor hour than Spain. In this case, England should produce textiles and import wine.

David Ricardo is the economist who introduced comparative advantage. He argued that a country should trade even if they had an absolute advantage on every good. If, for instance, the US had an absolute advantage on all goods China can produce, it would still make sense for the US to trade with China. This is where the US produces the opportunity cost of producing different goods and services. Ricardo argued that countries need to specialize in goods they can produce at a lower opportunity cost and not those they can produce at a higher total level.

Implications of Comparative and Absolute Advantage On International Trade

Say the US can produce 4000 TV sets or 2000 cars and China can produce 2000 TV sets or 500 cars. In such a case, the US has an absolute advantage to build both cars and TV sets. However, from the numbers above, China is better at producing TV sets because giving up one car sees them produce four TV sets unlike the US, which gives up one car to produce 2 TV sets. On the other hand, the US only gives up two TV sets to give a car while China has to give up four TV sets to make a car. In this case, the US chooses to import TV sets and export cars and China imports cars and exports TV sets.