Absolute and Comparative Advantage in International Trade
Absolute advantage is a situation where a country can produce a product more efficient than any country in producing it. It also refer to ability to produce a particular good at a lower absolute cost than another. That’s mean a country that have an absolute advantage is a country that can produce a product that are due to some combination. The determinant of absolute advantage for a country is such as favorable climate, good soils,and accumulated expertise. For example, Bangladesh has an absolute advantage in textile industries.
The most important factor is Bangladesh has a very low labor costs in their country and Bangladesh also has a vibrant network of supporting industries that supply inputs to its garment manufacturers. According to Adam Smith, the country should specialize in the production of goods that have an absolute advantage. Then the country can trade their product to the other countries. For example, France can produce 2 unit wine in a hour, meanwhile Japan only can produce 1 unit wine in a hour, but Japan can produce 5 unit clock radios in one hour, meanwhile France only can produce 3 unit clock radios in one hour.
That means France have an absolute advantage in production of wine compare with Japan. So, France should specialize in production of wine and buy clock radios from Japan. Japan should specialize in production of clock radios and buy wine from france. Comparative advantage From economic perception, comparative advantage is refer to the ability to produce a good or service at a lower opportunity cost than another party. According to Ricardo, theory comparative encourage a country to specialize on the product that can produce in the most efficient ways. For example, Northland and Southland have produce food and clothes.
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If Northland and Southland have allocated 100 unit of resources to produce food, the output that Northland can gain is 50 units and Southland is 25 units. If Northland and Southland have allocate 100 unit resources to produce clothes, the output that Northland gain is 25 units and Southland can gain 50 units. This shows that Northland is more efficient in producing food, meanwhile Southland is more efficient in producing clothes. But there have some unrealistic qualification and assumption on the comparative theory.
This include we have assumed that in this world only have two countries and two oods, do not have transportation cost, no differences in the prices of resources in different countries, resources can move freely to another countries, assumed constant returns to scale, every country have a fixed stock of resources and free trade that does not change the efficiency, and the theory also assumed away the effects of trade on income distribution within a country.
In conclusion, the country that have absolute advantage and comparative advantage in production on certain goods, the country can gain a better economic advantage in production that products. Read about Mountainside Industries
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