Question

Some countries are better in the production of some products and some countries are efficient in other products. Considering this characteristic, “Differentiate between Absolute advantage and comparative advantages. ”Support your answer with suitable example.

Answer 1

In international trade there are many theories which act as a base for trade activities. These theories are given by different schools of economic thought like a Classical school of thought, Neoclassical school of thought and Modern school of thought. The forerunners of classical school of thought were Adam Smith and David Ricardo. In neoclassical school we have JS mill and AC Pigou. As a critic of classical and neoclassical school of thought, the modern school of thought emerged with the leadership of John Maynard Keynes. Analysing classical school of thought Adam Smith gave absolute cost advantage theory and David Ricardo gave comparative cost theory. In absolute advantage theory Adam Smith explains the significance of labour intensity and it has contributed to trade activities. whereas David Ricardo considered both labour and capital as intense use of production and based on the specialization international trade can take place between two countries.

Examples:

Absolute cost advantage theory

1. Two countries
2. Two commodities
3. Labour is only a factor of production.

Commodities	India	Japan
Supercomputer	10	15
Aircraft	20	10

In India one unit of labour produces 10 units of supercomputer but to produce the same in japan it requires 15 units of labour.. Therefore India has the absolute advantage in the production of supercomputers. In the same manner Japan has absolute advantage in the production of aircraft compared to India because it can make use of less labour force in production.

Comparative cost advantage.

1. Two countries
2. Two Commodities
3. Two factors of production like labour and capital.

Countries	Wine	Cloth
Portugal	80	90
England	120	100

In this example of comparative cost theory Portugal is having absolute advantage in the production of both the commodities. If that is the case trade cannot take place between countries. Therefore based on specialization and differences in production cost due to the difference in climatic condition, natural resources and geographical condition. One country must specialize in the production of one good for example Portugal can make use of labour intensive technology and can produce wine where England can make use of capital intensive technology and can produce cloth. This will lead to international trade between countries.