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Comparative Advantage vs Absolute Advantage

Comparative Advantage vs Absolute Advantage

There is a difference between being better at doing something and benefiting more from doing something. This is the simplest way to distinguish between absolute advantage and comparative advantage. One country may be faster than another country at producing the same product. However, the faster country may still buy that product from the slower country. This is because, in international trade, the focus is on benefits. So, if the faster country benefits more from buying the product than producing it, then it will buy rather produce that product. Read on to understand how all this works!

Comparative advantage vs. absolute advantage economics

While we compare comparative advantage vs. absolute advantage in economics, it is important to note that the two concepts do not necessarily go against each other. Let's explain each one.

First, we will look at the absolute advantage. Absolute advantage is essentially about being better at producing a given product. In economics terms, if one country is more efficient at producing a certain good, we say that country has an absolute advantage.

Absolute advantage is the ability of an economy to produce a certain good more efficiently than another economy can.

Note that efficiency is what gives the advantage here.

Absolute advantage means that one country can produce more of a good compared to another country using the same quantity of resources.

So, how does this work? Let's look at an example.

Consider two countries that only need labor to make coffee bags, Country A and Country B. Country A has a workforce of 50 and produces 50 bags of coffee every day. On the other hand, Country B has a workforce of 50, yet it produces 40 bags of coffee every day.

The example above shows that Country A has an absolute advantage over Country B in coffee production. This is because even though they both have the same number of workers, they produce more bags of coffee within the same duration when compared to Country B. This describes the economics of absolute advantage.

Now, let's look at the comparative advantage. Comparative advantage is all about opportunity cost. What does the economy have to forgo to produce a given product? In economics terms, the country that forgoes the least benefits to produce a certain product has the comparative advantage over other countries that forgo more benefits. For this reason, economists prefer comparative advantage to absolute advantage.

Comparative advantage is the ability of an economy to produce a given product at a lower opportunity cost than other economies would incur in producing the same product.

Note that a lower opportunity cost is what gives the advantage here.

In other words, are you benefiting more than others by producing this particular product? If yes, then you have a comparative advantage. If not, then you need to focus on a product that gives you the most benefits or costs you the least. Time for an example!

Let's consider two countries, Country A and Country B. Both countries can produce coffee and rice and sell both at the same price. When country A produces 50 bags of coffee, it forgoes 30 bags of rice. On the other hand, when Country B produces 50 bags of coffee, it forgoes 50 bags of rice.

From the example above, we can see that Country A has a comparative advantage in coffee production. This is because, for every 50 bags of coffee produced, Country A gives up 30 bags of rice, which is a lower opportunity cost than the 50 bags of rice Country B has to give up.

Similarities between absolute advantage and comparative advantage

While the two concepts are not necessarily against each other, there are only two significant similarities between absolute advantage and comparative advantage. Let's describe them.

  1. Both absolute advantage and comparative advantage are aimed at increasing output. Absolute advantage aims to increase output domestically by producing a good the country is most efficient in. Comparative advantage also aims to increase national output by combining both domestic production and imports.
  2. Both concepts can be applied to individuals, businesses, or economies as a whole. The concepts of absolute advantage and comparative advantage apply to all economic agents due to the concept of scarce resources and the need to maximize the benefits from these resources.

Absolute advantage vs. comparative advantage calculation

The calculation of absolute advantage vs. comparative advantage is different, with the comparative advantage being slightly more complex. For absolute advantage, we simply need to compare the quantities of output, and the country with the larger quantity wins the absolute advantage. However, comparative advantage is calculated by finding the opportunity cost for each country, and the country with the lower opportunity cost wins the comparative advantage.

The following formula is used to find the opportunity cost of producing a good in terms of another good.

Let's say the two goods are Good A and Good B:

\(\hbox{Opportunity Cost of Good A}=\frac{\hbox{Quantity of Good B}}{\hbox{Quantity of Good A}}\)

The good whose opportunity cost you want to find goes under.

Remember, for absolute advantage, you look for the higher quantity of output, whereas for comparative advantage, you calculate and find the lower opportunity cost.

Comparative advantage and absolute advantage analysis

Let's perform an analysis of comparative advantage and absolute advantage using an example. We will do this with two countries: Country A and Country B. These countries can produce different combinations of coffee and rice, as shown in Table 1 below.


Country ACountry B
Coffee 5,000500
Rice1,0004,000

Table 1. Production Possibilities Between Two Countries

Now, we can draw the production possibilities curves for both countries using the following:

  • Country A can produce 5,000 bags of coffee or 1,000 bags of rice;
  • Country B can produce 500 bags of coffee or 4,000 bags of rice;

Take a look at Figure 1 below.

Comparative Advantage vs Absolute Advantage Production Possibilities Curves StudySmarterFig. 1 - Production possibilities curves example

First, we can see that Country A has the absolute advantage in coffee production since it can produce up to 5,000 bags against Country B's 500 bags. On the other hand, Country B has the absolute advantage in rice production since it can produce up to 4,000 bags against Country A's 1,000 bags.

Next is comparative advantage. Here, we will calculate opportunity cost using the formula:

\(\hbox{Opportunity Cost of Good A}=\frac{\hbox{Quantity of Good B}}{\hbox{Quantity of Good A}}\)

We will now calculate the opportunity cost for both countries by assuming they will focus on the production of only one product. Let's calculate it for coffee first!

If Country A only produces coffee, then it forgoes the ability to produce 1,000 bags of rice.

The calculation is as follows:

\(\frac{\hbox{1,000}}{\hbox{5,000}}=\hbox{0.2 rice/coffee}\)

On the other hand, if Country B produces only coffee, then it will forgo the ability to produce 4,000 bags of rice.

The calculation is as follows:

\(\frac{\hbox{4,000}}{\hbox{500}}=\hbox{8 rice/coffee}\)

From the analysis above, Country A has a comparative advantage in the production of coffee since it has a lower opportunity cost of 0.2 when compared to the opportunity cost of Country B, which is 8.

This time, we will find the opportunity costs of producing rice.

If Country A only produces rice, then it forgoes the ability to produce 5,000 bags of coffee.

The calculation is as follows:

\(\frac{\hbox{5,000}}{\hbox{1,000}}=\hbox{5 coffee/rice}\)

On the other hand, if Country B produces only rice, then it will forgo the ability to produce 500 bags of coffee.

The calculation is as follows:

\(\frac{\hbox{500}}{\hbox{4,000}}=\hbox{0.125 coffee/rice}\)

The analysis above shows that Country B has a comparative advantage in the production of rice since it has a lower opportunity cost of 0.125 when compared to the opportunity cost of Country A, which is 5.

All in all, we can see that country A has the absolute advantage and comparative advantage in producing coffee, whereas Country B has the absolute advantage and comparative advantage in producing rice.

Absolute advantage vs. comparative advantage example

An example of a country with a comparative advantage over other countries globally is Ireland. Ireland has a comparative advantage in the production of grass-based milk and meat compared to other countries around the world1.

Indonesia has a comparative advantage in charcoal production compared to the rest of the world, as it is the largest global supplier of charcoal, with the highest surplus in 20214.

The Democratic Republic of Congo currently has a comparative advantage with the highest surplus recorded in tin production compared to the rest of the world5.

Japan also has a comparative advantage in automotive manufacturing compared to other countries globally2. Note that this does not mean that other countries will not produce some of these products; however, they are likely to import more than they produce domestically. Japan's comparative advantage in exporting cars is illustrated in Figure 2 below, which shows the top ten car exporters in the world3.

Comparative Advantage vs Absolute Advantage Top ten car exporters in the world StudySmarterFig. 2 - Top ten car exporters in the world. Source: World's Top Exports3

Read our articles on Comparative Advantage and International Trade to understand more about this area.

Comparative Advantage vs. Absolute Advantage - Key takeaways

  • Absolute advantage is the ability of an economy to produce a certain good more efficiently than another economy can.
  • Comparative advantage is the ability of an economy to produce a given product at a lower opportunity cost than other economies would incur in producing the same product.
  • We compare the quantities of output between countries, and the country with the larger quantity wins the absolute advantage.
  • Comparative advantage is determined by calculating to find the lower opportunity cost.
  • The formula for opportunity cost is as follows:\(\hbox{Opportunity Cost of Good A}=\frac{\hbox{Quantity of Good B}}{\hbox{Quantity of Good A}}\)

References

  1. Joe Gill, Brexit demands new efficiencies from Irish food industry, https://www.irishtimes.com/business/agribusiness-and-food/brexit-demands-new-efficiencies-from-irish-food-industry-1.2840300#:~:text=Ireland%20has%20an%20established%20comparative,system%20remain%20fragmented%20and%20inefficient.
  2. Gary Clyde Hufbauer, Will Auto Trade Be a Casualty of US-Japan Trade Talks? https://www.piie.com/blogs/trade-and-investment-policy-watch/will-auto-trade-be-casualty-us-japan-trade-talks
  3. Daniel Workman, Car Exports by Country, https://www.worldstopexports.com/car-exports-country/
  4. Daniel Workman, Top Charcoal Exporters by Country, https://www.worldstopexports.com/top-charcoal-exporters-by-country/
  5. Daniel Workman, Top Tin Exporters by Country, https://www.worldstopexports.com/top-tin-exporters/

Frequently Asked Questions about Comparative Advantage vs Absolute Advantage

Absolute advantage focuses on efficiency, whereas comparative advantage focuses on opportunity cost.

Yes, a country can have both absolute and comparative advantage.

If a country is more efficient in producing a certain good, then that country has an absolute advantage over other countries who are less efficient.

Comparative advantage is calculated by finding the opportunity cost incurred by the different countries when they produce a given product. The country with the lowest opportunity cost wins the comparative advantage.

Absolute advantage is the ability of an economy to produce a certain good more efficiently than another economy can.

Comparative advantage is the ability of an economy to produce a given product at a lower opportunity cost than other economies would incur producing the same product.

Final Comparative Advantage vs Absolute Advantage Quiz

Question

What is absolute advantage?

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Answer

Absolute advantage is the ability of an economy to produce a certain good more efficiently than another economy can.

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Question

What is comparative advantage?

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Answer

Comparative advantage is the ability of an economy to produce a given product at a lower opportunity cost than other economies would incur producing the same product.

Show question

Question

Absolute advantage focuses on opportunity cost.

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Answer

False

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Question

Absolute advantage looks at the country with the highest efficiency.

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Answer

True

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Question

Comparative advantage looks at the country with the lowest efficiency.

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Answer

False

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Question

Comparative advantage goes to the country with the lowest opportunity cost.

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Answer

True

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Question

Opportunity cost for good A is: 

\(\hbox{Opportunity Cost of Good A}=\frac{\hbox{Quantity of Good A}}{\hbox{Quantity of Good B}}\)

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Answer

False

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Question

A country can have both absolute and comparative advantage.

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Answer

True

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Question

The production possibilities curve plots price and quantity.

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Answer

False

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Question

The production possibilities curve is useful in illustrating both absolute and comparative advantage.

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Answer

True

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Question

Absolute advantage can apply to individuals.

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Answer

True

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Question

Comparative advantage only applies to countries.

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Answer

False

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Question

Both absolute advantage and comparative advantage can apply to businesses.

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Answer

True

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Question

Economists focus on comparative advantage over absolute advantage.

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Answer

True

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Question

Comparative advantage focuses on maximizing benefits.

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Answer

True

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