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 they 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 as per the limited resources. Absolute resources, on the other hand, are based on opportunity cost. That is the equal benefits that could be gained.
Trade allows nations to specialize in what goods they produce most or what is more available. Specialization has the effect of reducing the costs of production and, as a result, price of goods decreases. The nation then develops a comparative advantage even though a nation produces goods inefficiently.
Countries experiencing a low skilled labor force tend to specialize in the export and production of goods which has a predominant cost component. In the same vein, low-income countries are typically specialized in a narrow range of products.
Comparative advantage enables both sides to benefit from trading. This is because of each side access goods at a lower price than its opportunity cost. On the other hand, producers produce more goods using fewer resources in the existence of an absolute advantage.
Also, comparative advantage determines what a nation will specialize in, whereas absolute advantage plays the role of just being significant to a nation.
Which of the following is always true?
A. Comparative advantage implies absolute advantage
B. Comparative advantage does not require absolute advantage
C. Comparative advantage requires absolute advantage
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