Comparative Advantage vs Absolute Advantage

A country producing goods at a lower cost than its trading partner has an absolute advantage. On the other hand, a country is said to have a comparative advantage over others in producing a particular good if it can produce that good at a lower relative opportunity cost.

Different economies or producers are compared by absolute advantage. A producer requiring fewer inputs in producing a good has an absolute advantage. Even when a country has a comparative advantage over others, both parties can benefit from trading because each side will receive a good at a lower price.

Specialization is the focus on the production of goods in which countries’ resources is best at. Comparative advantage influences the production of goods because most resources are limited in any given country.

Trade allows nations to usually specialize in what goods they can produce the most. Specialization has the effect of reducing the costs of production and, as a result, the price of goods decreases. This nation then develops a comparative advantage and can export these goods in exchange for goods from other countries.

Countries experiencing a low skilled labor force tend to specialize in the production of goods which have a predominant cost component. In the same vein, low-income countries are typically specialized in a narrow range of products whereas countries like Germany export a wide range of products.

Comparative advantage enables both sides to benefit from trading. This is because each side accesses goods at a lower price than its opportunity cost. On the other hand, producers could produce more goods using fewer resources if they were is a situation of absolute advantage.

Question

Which of the following statements is most accurate?

A. Comparative advantage implies absolute advantage

B. Comparative advantage does not require absolute advantage

C. Comparative advantage requires absolute advantage

Solution

The correct answer is B.

Comparative advantage does not require absolute advantage and also does not imply absolute advantage. Absolute advantage refers to producing a good with a smaller quantity of inputs, whereas comparative advantage refers to the ability to produce a particular good at a lower opportunity cost than the other party.

Reading 19 LOS 19c:

Distinguish between comparative advantage and absolute advantage

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