Detail Guide | What are Comparative Advantage and Absolute Advantage?
There is always a confusion to economics student about what are Comparative Advantage and Absolute Advantage. So, in this article we have articultaed some points regarding this two concepts.
What are Comparative Advantage
The ability of the producer to produce goods & services at lower opportunity cost is called comparative advantage.
Opportunity cost: The cost measured in terms of best alternative forgone. An example of opportunity cost is the forgone of interest that a person had gained by saving money in a bank instead of starting a new business at a given time.
A country is said to have a comparative advantage if it has to forgo less of other goods to produce it. In 1817, political economist David Ricardo gave the concept of comparative advantage. He wrote the concept in his book “On the Principles of Political Economy and Taxation.”
The doctrine of comparative advantage holds a diverse understanding of economics. Generally, the concept is used in international trade. Countries cannot be self-sufficient in all of the goods. So, the country must focus on those goods that it holds a comparative advantage.
Most of the developing & least developed countries cannot compete with those advanced and developed countries. The only choice for them is the passable exploitation of available resources.
The countries can achieve their actual potential growth if they focus on those goods holding a comparative advantage. Within the dogma, two Swedish economists, Eli Heckscher and Bertil Ohlin analyzed comparative costs. They put a crucial opinion on how do comparative costs occur. The submissive explanation was the difference in factor endowments.
An outlook to the advanced and developing economy depicts a scenario of factors in abundance. The advanced economies hold abundance in capital ie; capital intensive. The developing and least developed economies hold abundance in labor ie; labor-intensive. For instance, the advanced countries’ major shares of production are machinery, electrical equipment which is capital intensive. The developing countries’ major share of production is an agricultural commodity, textile, garment which is labor-intensive.
An example of comparative advantage can be analyzed between leading producers in the world. Brazil is the world’s largest producer of coffee. Mexico is the world’s largest producer of avocado. Between these countries, Brazil holds a comparative advantage in the production of coffee. Likewise, Mexico holds a comparative advantage in the production of avocado. This is due to differences in factors of production like climate, geography, etc.
Those countries can exploit international markets via goods having a comparative advantage. In addition, the benefit of comparative advantage is the ability of countries to know actual potential growth. Finally, it leads to efficiency, productivity, and welfare of the country in all dimensions ie; social, economic, and environmental.
What are Absolute Advantage
The ability of the producer to produce the same quantity of goods & services with fewer resources than any other producer. A country is said to have an absolute advantage if it can produce goods & services with low exploitation of resources than any other countries.
In 1776, famous Scottish economist Adam Smith gave the concept in his book “Wealth of Nations”. The tenet of absolute advantage was implied in the context of international trade.
The country having this advantage can gain from specialization leading to economies of scale.
An example of absolute advantage can be analyzed between two countries ie; Nepal and Bangladesh. For instance, Nepal can produce one unit of carpet with 60 hours of labor and Bangladesh with 80 hours of labor. Here Nepal holds an absolute advantage in the production of carpets. Likewise, Bangladesh can produce one unit of cloth with 40 hours of labor and Nepal with 50 hours of labor. Here, Bangladesh holds an absolute advantage in the production of cloth.
Countries with the diplomatic relationship can get full advantage of absolute advantage. Nepal can produce an additional unit of carpets with labor averted towards producing carpet instead of cloth. Likewise, Bangladesh can produce an additional unit of cloth with labor averted towards producing cloth instead of cloth. This helps respective countries to specialize in goods with full potential.
Therefore, international trade becomes the foremost way of gaining a mutual benefit. The benefit of absolute advantage is the full exploitation of raw materials to gain potential output in a passable way.
Being audience-oriented, we tried to articulate what are Comparative Advantage and Absolute Advantage? Therefore, comparative advantage and absolute advantage are two major concepts in economics.
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