Question

Compare and contrast the theory of absolute advantage and the theory of comparative advantage. What is the significancr of each in developing a nation's policies.

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Answer 1

Absolute Advantage is a country's intrinsic capacity that enables the country to efficiently and effectively manufacture specific goods at relatively low marginal cost. A nation has an absolute advantage in manufacturing a good because it can manufacture the good at lower production cost, lower labor, less time and lower expense without losing the quality. Comparative Advantage refers to the capacity of the nation to manufacture the particular good at lower marginal cost and cost of opportunity as opposed to other countries. Comparative advantage takes into account both marginal and opportunity costs in absolute advantage where the focus is only on marginal cost.

All Absolute Advantage and Comparative Advantage are important foreign trade principles that help countries make decisions about domestic commodity production, resource distribution, import and export etc. The Absolute Advantage is a country's inherent ability to produce particular goods efficiently and effectively at relatively low marginal cost. However, the Comparative Advantage principle refers to the capacity of the nation to manufacture the particular product at lower marginal cost and cost of opportunity.

The definition of absolute advantage is based on the lower marginal cost of manufacturing a specific product. Nonetheless, the competitive advantage deals with the lower manufacturing opportunity cost of a specific product relative to the competitor nation.
Countries with the utter benefit of creating a strong emphasis on optimizing output with the same resources available. Countries with a competitive advantage, however, take account of the country's production of various products before deciding on the output of a particular allocation of goods and resources for the same.

Trade transactions between countries with the absolute benefit are necessarily not mutually beneficial. Export decisions based on a competitive advantage are in fact mutually beneficial.
Absolute benefit for the economy may not be very efficient and helpful, because it focuses on optimizing production without understanding the production cost of opportunity. Comparative advantage, however, is more successful in helping countries make resource allocation decisions, domestic exports, and import / export goods.