Absolute advantage: The capability to produce more of a given product using less of a given

resource than a competing entity.

Absolute advantage refers to the ability of a country to produce a good more efficiently than
other countries. In other words, a country that has an absolute advantage can produce a good
with lower marginal cost (fewer materials, cheaper materials, in less time, with fewer workers,
with cheaper workers, etc.). Absolute advantage differs from comparative advantage, which
refers to the ability of a country to produce specific goods at a lower opportunity cost.

A country with an absolute advantage can sell the good for less than a country that does not have
the absolute advantage. For example, the Canadian economy, which is rich in low cost land, has
an absolute advantage in agricultural production relative to some other countries. China and
other Asian economies export low-cost manufactured goods, which take advantage of their much
lower unit labor costs.

Comparative Advantage

In economics, comparative advantage refers to the ability of a party to produce a particular good
or service at a lower marginal and opportunity cost over another. Even if one country is more
efficient in the production of all goods (has an absolute advantage in all goods) than another,
both countries will still gain by trading with each other. More specifically, countries should
import goods if the opportunity cost of importing is lower than the cost of producing them
locally.

Specialization according to comparative advantage results in a more efficient allocation of world

resources. Larger outputs of both products become available to both nations. The outcome of
international specialization and trade is equivalent to a nation having more and/or better
resources or discovering improved production techniques.

Absolute vs. Comparative Advantage: An Overview

Absolute advantage and comparative advantage are two important concepts in economics and
international trade. They largely influence how and why nations and businesses devote resources
to the production of particular goods.

In isolation, absolute advantage describes a scenario in which one entity can manufacture a
product at a higher quality and a faster rate for a greater profit than another competing business
or country can accomplish.

Comparative advantage differs in that it takes into consideration the opportunity costs involved
when choosing to manufacture multiple types of goods with limited resources.

Absolute advantage refers to the uncontested superiority of a country or business to produce a

particular good better.

Comparative advantage introduces opportunity cost as a factor for analysis in choosing between
different options for production diversification.
Absolute Advantage
The differentiation between the varying abilities of companies and nations to produce goods
efficiently is the basis for the concept of absolute advantage. Absolute advantage looks at the
efficiency of producing a single product.

This analysis helps countries avoid the production of products that would yield little or no
demand, leading to losses. A country’s absolute advantage, or disadvantage, in a particular
industry, can play an important role in the types of goods it chooses to produce.

As an example, if Japan and Italy can both produce automobiles, but Italy can produce sports
cars of a higher quality and at a faster rate with greater profit, then Italy is said to have
an absolute advantage in that particular industry.

In this example, Japan may be better served to devote the limited resources and manpower to
another industry or other types of vehicles, such as electric cars, in which it may enjoy an
absolute advantage, rather than trying to compete with Italy's efficiency.

 
While absolute advantage refers to the superior production capabilities of one entity versus
another in a single area, comparative advantage introduces the concept of opportunity cost.

Comparative Advantage
Comparative advantage takes a more holistic view, with the perspective that a country or
business has the resources to produce a variety of goods. The opportunity cost of a given option
is equal to the forfeited benefits that could have been achieved by choosing an available
alternative in comparison.

In general, when the profit from two products is identified, analysts would calculate the
opportunity cost of choosing one option over the other.

For example, assume that China has enough resources to produce either smartphones or
computers. China can produce 10 computers or 10 smartphones. Computers generate a higher
profit.

Therefore, the opportunity cost is the difference in value lost from producing a smartphone rather
than a computer. If China earns $100 for a computer and $50 for a smartphone then the
opportunity cost is $50. If China has to choose between producing computers over smartphones
it will select computers.

Key Differences Between Absolute Advantage vs Comparative Advantage

Both Absolute Advantages vs Comparative Advantage are popular choices in the market; let us
discuss some of the major Difference Between Absolute Advantage vs Comparative Advantage

 Both Absolute advantages vs Comparative advantage are important concepts of

international trade that help countries make decisions on domestic productions of goods,
resource allocation, import, export, etc.
 The Absolute Advantage is the country’s inherent ability to produce specific goods
efficiently and effectively at a relatively lower marginal cost. However, Comparative
Advantage refers to the country’s capability to produce the specific good at lower
marginal cost and opportunity cost.
  The absolute advantage concept is based on a lower marginal cost of production of a
specific good. However, comparative advantage deals with the lower opportunity cost of
production of a specific good compared to competitor Country.
 Countries with an absolute advantage of producing a good focus on maximizing
production with the same available resources. However, Countries with comparative
advantage take into account the production of multiple goods in the country while
deciding the production of a specific good and resource allocation.
 The comparative advantage concept is more effective in helping countries in the decision-
making of resource allocation, production, and trade compared to absolute advantage.
 Trades transactions between countries having the absolute advantage are not mutually
beneficial in nature. Trades decisions based on comparative advantage are mutually
beneficial in nature.
 Absolute advantage may not be very effective and beneficial for the economy as it
focuses on maximizing production without considering the opportunity cost of
production. However, comparative advantage is more effective in helping Countries
taking decisions related to resource allocation, domestic productions, and import/export
of goods.

The Basis Of Absolute Advantage Comparative Advantage

Comparison
Between Absolute
Advantage vs
Comparative
Advantage

Definition The Absolute Advantage is the The concept of Comparative

country’s inherent ability to Advantage refers to the country’s
produce specific goods efficiently capability to produce the specific
at a lower marginal cost compared good at lower marginal cost and
 to other countries. opportunity cost compared to other
countries.

Basic Concept It deals with the lower marginal It deals with lower marginal and
cost of production of a specific opportunity cost of production of a
good in comparison to competitor specific good compared to
Country. competitor Country.

Trade Benefits The concept of absolute advantage Both the Countries in transactions
may not always be mutually are mutually benefitted because of
beneficial for both the countries the comparative advantage of each
involved in the trade transaction. other.

Cost of Production Absolute advantage refers to Comparative advantage

lowering the production cost of a specifically refers to the lower
specific good in comparison to opportunity cost of production of
competitors. specific goods in comparison to
competitors.

Production of Goods Countries having an absolute Countries with comparative

advantage of producing a good advantage take into account the
produces a higher volume of that production of multiple goods in a
good with the same available country while deciding the
resources. production of a specific good and
resource allocation for the same.
 Resource allocation An absolute advantage may not be
very effective in deciding the
resource allocation by a Country
for the production of a good as it
doesn’t consider the opportunity
cost of production.
Comparative advantage considers
the opportunity cost of production;
it is more effective in decisions for
resource allocation, domestic
production, and import of specific
goods.

Benefits to Economies Trades in the context of absolute Trades decisions based on

advantage are not mutually comparative advantage are
beneficial in nature. mutually beneficial in nature.

Effectiveness for The concept of absolute advantage Comparative advantage is more

Economy may not be very effective as it effective in helping Countries
focuses on maximizing production taking decisions related to resource
with the same available resources allocation, domestic productions
without considering the and import/export of goods.
opportunity cost of production.

Conclusion

The concept of Absolute Advantage vs Comparative Advantage is related to economics and trade
which helps countries make logical decisions on resource allocation for the production of
specific goods, import and export of goods while considering the marginal cost and opportunity
cost of producing goods. Absolute advantage focuses on the marginal cost of producing a good,
whereas comparative advantage specifically focuses on the opportunity cost of production. Trade
decisions based on comparative advantage between countries are always mutually beneficial.
Comparative advantage helps in more effective decision-making for countries for resource
allocation and production hence more beneficial for economies than absolute advantage.

REFERENCES
Bernhofen, Daniel M (2005). "Gottfried haberler's 1930 reformulation of comparative advantage in
retrospect". Review of International Economics.  13  (5): 997–1000. doi:10.1111/j.1467-
9396.2005.00550.x.  S2CID 9787214.

Bernhofen, Daniel M.; Brown, John C. (2004). "A Direct Test of the Theory of Comparative Advantage: The
Case of Japan".  Journal of Political Economy. 112 (1): 48–
67.  CiteSeerX 10.1.1.194.9649. doi:10.1086/379944.  S2CID 17377670.

Bernhofen, Daniel M.; Brown, John C. (2005). "An Empirical Assessment of the Comparative Advantage Gains
from Trade: Evidence from Japan".  American Economic Review. 95 (1): 208–
25.  doi:10.1257/0002828053828491.