Question

Discussion Assignment: Compare and contrast Comparative Advantage with Absolute Advantage. Do these have a place in today's world? Please make sure to review the concepts in your book. Absolute Advantage: "Ability of a nation to produce a good more efficiently than any other nation." (Wild & Wild, 2018, pag. 137) Comparative Advantage: "Inability of a nation to produce a good more efficiently than other nations but an ability to produce that good more efficiently that it does any other good." (Wild & Wild, 2018, pag. 138)

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Answer 1

The concepts of Absolute advantage and Comparative advantage are crucial pillars of International trade . They certainly have a place in today's world. The theory of absolute advantage was propagated by Adam smith in his book "an inquiry into the nature and causes of the wealth of nations" back in the 18th century . According to the theory of absolute advantage countries should be trading goods that they excel in producing than the others . Smith cited the classic example of England and Portugal , England having an absolute advantage over producing textile while Portugal has absolute advantage over producing wine . so quite naturally England will trade textiles in exchange of wine. Portugal will trade wine with textile from England.

The concept of Comparative advantage was not known till David Ricardo in the 19th century . According to Ricardo the country should trade those goods that it can produce with a lower opportunity cost . Suppose if a country has absolute advantage over all the goods in comparison with the other country then as per the theory of absolute advantage no trade is suppose to take place . However the theory of comparative advantage allows both countries to trade with the help of determination of opportunity cost . For example Japan and USA in the 80's were top manufacturers of automobiles ; Japan had absolute advantage over their production of high end automobiles at very short time ie they were efficient .

Comparative advantage is a very beneficial concept , as it allows small countries who are far from being price makers to take part in International trade , as with the help of determination of opportunity cost countries can decide on what will be beneficial for them to produce to earn an income through international trade .