ABSOLUTE COST

ADVANTAGE AND
COMPARATIVE COST
ADVANTAGE
SUBMITTED TO: NISHA KAUSHIK
S U B M I T T E D B Y:  
BALPREET KAUR(10)
B H AV I N S H A R M A ( 11 )
D A P I N D E R PA L S I N G H L O O N A ( 1 2 )

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WHAT IS ABSOLUTE ADVANTAGE?
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 its competitors.

Absolute advantage is when a producer can provide a good or service in greater quantity for the same
cost, or the same quantity at a lower cost, than its competitors.

The concept of absolute advantage was developed by 18th-century economist Adam Smith in his
book The Wealth of the Nations to show how countries can gain from trade by specializing in producing
and exporting the goods that they can produce more efficiently than other countries.

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 Countries with an absolute advantage can decide to
WHAT IS specialize in producing and selling a specific good or
ABSOLUTE service and use the generated funds to purchase goods
and services from other countries.
ADVANTAGE
? Few examples are: It is easier to extract oil in Saudi Arabia
than in any other country. The abundance of oil in Saudi
Arabia makes it easier as if it’s only drilling an oil whereas
for other countries it involves exploration and drilling cost.

Colombia has the climatic advantage of producing coffee.

Thus, it can produce coffee at a lower cost than other
countries

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 PROS AND CONS OF THE THEORY OF ABSOLUTE
ADVANTAGE
PROS CONS

Simple illustration of why countries can
benefit by trading on their advantages.
Lacks the explanatory power of the theory of
comparative advantage.
Does not account for costs or barriers to
trade.
Has been used to justify exploitative policies.

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WHAT IS Comparative advantage is an economy's ability to
COMPARATIV produce a particular good or service at a lower
opportunity cost than its trading partners.
E
ADVANTAGE Comparative advantage is used to explain why
? companies, countries, or individuals can benefit from
trade.

Absolute advantage refers to the uncontested

superiority of a country to produce a particular good
better

When used to describe international trade, comparative

advantage refers to the products that a country can
produce more cheaply or easily than other countries. 

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WHAT IS
COMPARATIV The key to understanding comparative advantage is a solid grasp of
opportunity cost. Put simply, an opportunity cost is a potential benefit that
E someone loses out on when selecting a particular option over another.

ADVANTAGE
?
Few examples of comparative advantage are:

Suppose the US and Japan can produce wheat or rice but not both. The US
could produce 30 units of wheat or ten units of rice, and Japan could produce
15 units of wheat or 30 units. Thus, the opportunity cost of wheat is three
units of wheat for 1 unit of rice for the US, whereas 0.5 units of wheat for
each unit of rice for Japan. Thus, Japan has a comparative advantage in rice
production since it has a lower opportunity cost.

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 PROS AND CONS OF
COMPARATIVE ADVANTAGE
PROS CONS

 Higher Efficiency  Developing countries may be kept at a

relative disadvantage
 Improved profit margins
 May promote unfair or poor working
 Lessens the need for government conditions elsewhere
protectionism
 Can lead to resource depletion
 Risk of over-specialization
 May incentivize rent-seeking

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ASSUMPTIONS
OF THE THEORY Both Smith's theory of absolute advantage, and Ricardo's theory of
comparative advantage, rely on certain assumptions and simplifications in
OF ABSOLUTE order to explain the benefits of trade.

ADVANTAGE
AND Barriers to Trade: Both theories assume that there are no barriers to trade.
COMPARATIVE They do not account for any costs of shipping or additional tariffs that a
country might raise on another's imported goods. 
ADVANTAGE
Factors of Production: Both theories also assume that the factors of
production are immobile. In these models, workers and businesses do not
relocate in search of better opportunities. 

Consistency and Scale: More crucially, these theories both assume that a
country's absolute advantage is constant and scales equally. In other words, it
assumes that producing a small number of goods has the same per-unit cost
as a larger number and that countries are unable to change their absolute
advantages.

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 ABSOLUTE ADVANTAGE VS
COMPARATIVE ADVANTAGE
ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE

 A country has an absolute advantage if it  The country has a comparative advantage if the
produces a large number of goods with the Country can produce a particular product with
same resources as provided to another better quality at a lower price than another
country. country.

 There is no mutual benefit in absolute trade-  The trade is mutually benefited with
in advantage. comparative advantage.

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 ABSOLUTE ADVANTAGE VS
COMPARATIVE ADVANTAGE
ABSOLUTE ADVANTAGE COMPARATIVE ADVANTAGE

 Cost is a factor to determine if the country  Opportunity cost is a factor that determines
has an absolute advantage. if the country has a comparative advantage.

Determines resource allocation, trade Determines the direction of trade and

pattern and trade volume International production.

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 COMPARATIVE ADVANTAGE VS. COMPETITIVE
ADVANTAGE
 Comparative advantage refers to a company, economy, country, or individual's ability to
provide a stronger value to consumers as compared with its competitors. It is similar to, but
distinct from, comparative advantage.
 In order to assume a competitive advantage over others in the same field or area, it's
necessary to accomplish at least one of three things:
the company should be the low-cost provider of its goods or services,
it should offer superior goods or services than its competitors,
 it should focus on a particular segment of the consumer pool.

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•The Heckscher-Ohlin model evaluates
the equilibrium of trade between two
countries that have varying specialties
and natural resources.
•The model explains how a nation
should operate and trade when
resources are imbalanced throughout
the world.
•The model isn't limited to commodities,
but also incorporates other production
factors such as labor.

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Leontief's Paradox

•The Leontief Paradox, as it came to be known, led many economists to question the
Heckscher-Ohlin Theorem, which states that countries produce and export what they can
create most efficiently, depending on their factors of production. Moreover, they import goods
that they cannot produce as efficiently.

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 EXAMPLE

 Consider two countries, A and B, which have the following

MAIZE CORN dynamics for the production of Maize and Corn. The output
for an equal number of resources per day is shown in the
Country 30 15 image.
A  For Country A, the opportunity cost of producing 15 units of
Corn is 30 units of Maize, or we can say Country A has an
Country 5 10 opportunity cost of producing 1 unit of Corn to 2 units of
B Maize. Similarly, country B has the opportunity cost of
producing 1 unit of Corn to 0.5 units of Maize. Since the
opportunity cost of producing Corn in country B is less, it has a
comparative advantage.

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 EXAMPLE
 Similarly, Country A has an opportunity cost of 0.5 units of Corn to produce 1 unit of Maize,
and country B has an opportunity cost of 2 units of Corn to produce 1 unit of Maize. Thus,
country A has a comparative advantage over Country B in the production of Maize. However, it
has an absolute advantage since Country A can produce both Corn and Maize higher than
Country B.
 Thus, if Country A produces and trades Maize while country B produces and trades Corn, both
the countries will benefit from the trade with lower opportunity costs and higher efficiency.
 In the above example, we have seen that even if A has an absolute advantage in producing all
the goods, a different country can have a different comparative advantage. Comparative
advantage helps the countries decide which goods they should produce and drive the trade.
Comparative advantage drives specialization in producing goods in a country as they have a
lower opportunity cost and thus lead to higher production and better efficiency.

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  Srivastav, A. K. (2022, September 7). Absolute Advantage vs
Comparative Advantage. WallStreetMojo.
https://www.wallstreetmojo.com/absolute-advantage-vs-comparative-a
dvantage/
 International trade | Definition, History, Benefits, Theory, & Types.
(1998, July 20). Encyclopedia Britannica.
https://www.britannica.com/topic/international-trade/Sources-of-com
parative-advantage
REFERENCES  Absolute Advantage: Definition, Benefits, and Example. (2023, January
12). Investopedia.
https://www.investopedia.com/terms/a/absoluteadvantage.asp
 What Is Comparative Advantage? (2022, August 29). Investopedia.
https://www.investopedia.com/terms/c/comparativeadvantage.asp
 WallStreetMojo. (2020, June 8). Absolute Advantage vs Comparative
Advantage - Compare & Contrast (Top Differences You Must Know!)
[Video]. YouTube. https://www.youtube.com/watch?v=dcCCDOddsag

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VIDEO REFERENCE
https://www.youtube.com/watch?v=dcCCDOddsag&embeds_euri=https%3A%2F%2Fwww.wallst
reetmojo.com%2F&feature=emb_logo&ab_channel=WallStreetMojo

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THANK YOU!

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