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What Is the Difference between Absolute Advantage and Comparative Advantage?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 21 November 2016
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Absolute advantage is used to describe a situation in which a person, corporate entity or country can produce something at a price that is lower than others. Comparative advantage refers to a situation in which the same type of commodity can be produced with a lower opportunity cost than others. The difference between absolute advantage and comparative advantage lies in the difference between the advantages inherent in the two factors. Absolute advantage is focused on the advantage of cost, while comparative advantage is based on opportunity cost. Also, absolute advantage provides more benefits in trade than comparative advantage.

Comparative advantage occurs when a product can be produced more efficiently than other people, companies or countries producing the same good. The main benefit to comparative advantage in economics is the idea of trading a product one is more efficient at producing for a product he or she is less efficient at producing. This saves time, materials and labor, while also reducing the opportunity cost for producing the good. The reduction in opportunity cost shows a difference between absolute advantage and comparative advantage.

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An example of this difference is if Country A can produce 10 pairs of shoes per hour and two sets of pencil per hour, while Country B can produce 100 sets of pencil per hour and one pair of shoes per hour, both countries have comparative advantage in different items. While Country A has comparative advantage in the production of shoes, Country B has comparative advantage in the production of pencils. Both countries can mutually benefit from trading in those two items in order to compensate for the items they are less efficient at producing.

Another example of the difference between absolute advantage and comparative advantage is the kind of benefits attached to an absolute advantage concerning the production of an item. Such a variance might be that Country A has an abundant resource of fresh oranges supplied by local farmers, while Country B does not have the kind of climate that permits the growth of oranges and must import its oranges from other countries. Country A has an absolute advantage over Country B in the production of orange juice simply because it can obtain oranges at a much cheaper rate and without expending too much labor, including transportation logistics. The absolute advantage Country A has is due to its close proximity to the source of the raw material, unlike Country B, which has to put in extra effort just to get the raw material needed to produce the same end product. This makes it more prudent for Country B to import the finished product from Country A.

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anon956392
Post 4

What are the effects of unemployment in Namibia?

turquoise
Post 3

Absolute advantage is an old idea. It was important for a while after mercantilism. Mercantilism told countries to export but not import. Absolute advantage changed this and countries were told to both export and import. But they were expected to export what they had an absolute advantage in. Then the idea of comparative advantage came along.

None of these theories are perfect however. Comparative advantage still holds ground but it's highly possible that it will be updated with a newer and better theory.

SteamLouis
Post 2

@donasmrs-- I think that opportunity cost is the cost of the lost opportunity to produce something else.

If you choose to use your resources to produce something that is not efficient for you, it will have a high opportunity cost. If you switch to a product that you can make more efficiently (with less resources and at a lower cost), you will be producing something that you have a comparative advantage in.

Only one country has an absolute advantage in a good. But many countries can have comparative advantage in one good. This is how the theory of comparative advantage in economics encourages trade.

donasmrs
Post 1

What does opportunity cost mean? How is this different from price?

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