Difference Between Absolute Advantage and Comparative AdvantageJose Francisco Lopez , Guillermo Westreicher
The difference between absolute advantage and comparative advantage lies in opportunity cost .
To properly understand the difference, we must assimilate the two concepts well. Thus, the absolute advantage developed by Adam Smith , tells us that a country has an absolute advantage over another if it is capable of producing the same thing with fewer resources. For its part, David Ricardo 's comparative advantage refers to those cases in which one country can produce more than another with a lower opportunity cost.
From the above, we can deduce that the theory of comparative advantage is an improvement on the theory of absolute advantage.
The opportunity cost of comparative advantage
When Adam Smith developed the concept of absolute advantage, he said that one country had an advantage over another if it produced the same thing with fewer resources. David Ricardo, when improving it, indicated that not only the production of a single good should be taken into account, but also what was not produced from other goods.
So if country A produces 1 computer in 10 hours and country B produces 1 computer in 20 hours, then country A has an absolute advantage over B. Now, what if country A produced 1 computer in 10 hours, are you sacrificing the production of other products?
Taking this difference into account, countries are not going to specialize in what they are most productive in, but in what produces a lower opportunity cost. That is, where they are comparatively more competitive.
Example of the difference between absolute and comparative advantage
Let's continue with the same example as above. We will consider two technology and food sectors for each country (A and B). The technology sector produces computers and the food sector bananas.
The table expresses the units of labor hours dedicated (the only factor taken into account) to produce 1 computer (technology) or 1 kilo of bananas (food).
|Product / Country||TO||B.|
The table above tells us that country A produces 1 computer in 10 hours and 1 kilo of bananas in 5 hours. For its part, country B produces 1 computer in 20 hours and 1 kilo of bananas in 8 hours. Country A has an absolute advantage in both technology and food, as it is capable of producing more in 1 hour. And the comparative advantage?
The first thing we will do is take into account the relationships:
- Technology / power ratio:
- Country A -> 10 / 5 = 2
- Country B -> 20 / 8 = 2.5
Assuming that the terms of trade are maintained, if country A wants to produce one more computer, it will have to give up producing 2 kilos of bananas. In the case of country B, if it wants to produce one more computer, it will have to give up producing 2.5 kilos of bananas. This reflects that the opportunity cost of producing one more computer is greater for country B, since it must stop producing more kilos of bananas.
Summarized in a table, we have the following relationships:
|Product / Country||TO||B.|
The table above indicates the following for each country:
- Country A gives up producing 1 computer for producing 2 kilos of bananas. And seen from the other point of view, stop producing 1 kilo of bananas allows you to increase the production of computers by 0.5 units.
- Country B gives up producing 1 computer for producing 2.5 kilos of bananas. And seen from the other point of view, stop producing a kilo of bananas allows you to increase the production of computers by 0.4 units.
Therefore, country A will specialize in producing computers and country B will specialize in producing bananas. As long as the relationship between both goods in terms of exchange remains between 2 and 2.5 computers per kilo of banana.
From the example we can conclude that, although a country is more efficient than another producing a certain good, it does not necessarily mean that it should specialize in that merchandise. This, because it might be even more efficient developing another activity.
Based on the concept of comparative advantage, we can also infer that two countries can trade even though one of them is less efficient than the other in all its production processes.