Absolute Advantage

• is the ability of an individual, company, region,

or country to produce a greater quantity of a
good or service with the same quantity of
inputs per unit of time, or to produce the same
quantity of a good or service per unit of time
using a lesser quantity of inputs, than another
entity that produces the same good or service.
 According to Adam
Smith, who is regarded as
the father of modern
economics, countries
should only produce goods
in which they have an
absolute advantage.
https://upload.wikimedia.org/wikipedia/commons/thumb/4/43/
Adam_Smith_The_Muir_portrait.jpg/220px-
Adam_Smith_The_Muir_portrait.jpg
Jill can make 4 cakes an hour while Jack can only make 2 cakes an
hour.

Jack 2 cakes 1 hour 5

4
3
2
1
Jill 4 cakes 1 hour 0
Unit Per hour

Jill Jack
 Assumptions Underlying the Theory of Absolute
Advantage

1. Lack of Mobility for Factors of Production

2. Trade Barriers
3. Trade Balance
4. Constant Return to Scale
 According to David
Ricardo who wrote the
book Principles of Political
Economy and Taxation
(1817), if someone simply
does what they’re best, it’s
possible that some countries
aren’t best at anything.
Comparative Advantage

• Is the ability to produce a

particular good or service at a
lower opportunity cost than its
trading partners.
 EXAMPLE: PHILIPPINE COUNTRY

ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE

• AGRICULTURE • TECHNOLOGIES/MACHINERIES

https://www.shutterstock.com/image-photo/saplings-that-grow- https://www.morganstanley.com/content/dam/msdotcom/ideas/
on-pile-260nw-1710948379.jpg tech-wave/tw-tech-wave.jpg
 EXAMPLE: JAPAN COUNTRY

ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE

• CAR PRODUCTION • AGRICULTURE

http://cdn.cnn.com/cnnnext/dam/assets/171101094021- https://borgenproject.org/wp-content/uploads/Farming-
toyota-concept-i-tease-1-super-tease.jpg Innovations-in-Japan.jpg
Comparative Advantage

• Is the ability to produce a

particular good or service at a
lower opportunity cost than its
trading partners.
Opportunity Cost
• An opportunity cost is the foregone benefits
from choosing one alternative over others.
Comparative Advantage and its Benefits in Free Trade
Theory on Comparative Advantage
Introduces opportunity cost as a factor for
analysis in choosing between diff erent opti ons
for producti on.
Heckerscher-Ohlin Theory
The Heckscher-Ohlin Model, also known as the H-O
model or 2X2X2 model, is a theory in internati onal
trade that suggests that nati ons export goods in
abundance and produce effi ciently. 
Heckerscher-Ohlin Theory
•  It was developed by
Swedish economist Eli
Heckscher and his
student Bertin Ohlin
Components of the Heckscher-Ohlin Model
1. Factor Price Equalization
Theorem
TH E MOST FRAGI LE OF ALL , THE F PE STATES TH AT I T
WI LL EQUALIZE THE PRICES OF FAC TORS OF
PROD UC TI ON AMON G COU NTRI ES BECAUS E OF  
I N TE R N ATI O NA L TRA D E.
1. Factor Price Equalization Theorem

The most fragile of all, the FPE states that

it will equalize the prices of factors of
production among countries because of 
international trade.
2. Stolper-Samuelson Theorem 

 The Stolper-Samuelson theorem (SST)

proposed that, in any particular country,
an increase in the relative prices of the
labor-intensive goodwill makes labor
better off and capital worse off. The
converse also applies.
3. Rybczynski Theorem

It makes labor better off and capital worse off.

The converse also applies.
At constant prices, an increase in the
endowment of one factor will lead to an
expansion in the sector’s output that uses that
factor and will lead to a complete decline in
the production of the other goods.
4. Heckscher-Ohlin Trade Theorem

This is a critical theorem of this model, which

boils down to this statement “a country having
capital in abundance will produce goods that
are capital-intensive, and a country having
abundant labor will produce labor-intensive
goods.”