Question

Do a brief comparison about trade theories: Absolute Advantage, Competative Advantage, H-0 Theory

Answer 1

Absolute Advantage: -

Absolute advantage is said to happen when in between competing countries, one of them can produce a good or service with lesser raw materials at the same quality or with lesser time, thus gaining from the situation. Here if the country which has an absolute advantage starts exporting to the remaining world which is not a producer, the gains would be much more than other competition.

For example, when comparing the countries of United States of America and Russia, we see that both manufacture military equipment for the world. If in such a scenario, the United States can produce the equipment at a fraction of the cost or raw materials which are used by Russia, it is said to have an absolute advantage and would be in a better position to supply across the globe.

Comparative Advantage: -

Comparative advantage on the other hand is limited to a countries ability to be able to produce a good or a service at a lower opportunity cost than others. Opportunity cost refers to the cost lost if the country decided to produce the next best alternative.

For example, a country such as India has the choice of producing agricultural goods or to manufacture capital goods. Now, using the same piece of land and manpower which is largely unskilled in the country, we find that it has an advantage of producing agricultural goods over capital goods.

The theory thus advocates, that a country should produce those goods and services at which it has a comparative advantage in production. This would allow it to use fewer resources and produce in larger quantities which will bring in better gains for business.

Conclusion: -

We can conclude by saying that absolute advantage tells us that what goods a country can make with lesser raw materials or time whereas comparative advantage looks at the opportunity cost between producing two goods.

Please feel free to ask your doubts in the comments section if any.