Question

Discuss the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns? Justify your answer.

Please do not copy and paste.

Answer 1

• the concept of absolute advantage was first given by Adam Smith and he prescribed that when a country is in the position to produce more good and services with same resources as compare to some other country then the country would be in absolute advantage.
• David Ricardo presented the concept of comparative advantage where the comparison would be made in terms of opportunity cost,which means Even if a country is in absolute advantage it would only produce that good or service in which has lowest opportunity cost and would import the another good in consideration with exporting of surplus production.

we can understand the entire concept with the following example.

• FIRST CASE

as we can see that US is clearly efficiently more units of cloths in comparison with India and India can produce more shoes than USA.

thus USA would employ all its resource in production of cloth and would export the excess units and India would manufacture only shoes by engaging all its resources and would export shoes to USA in consideration of Clothes.

• SECOND CASE

but now in the second case, we can see that USA is efficient in making both the products as compare to India with same level of resources,now the concept of absolute advantage fades to conclude the trade.

now the concept of comparative advantage would help to determine the trade and both the country would only produce that ;product in which the opportunity cost is lower.as we can see from the following solution.

thus USA would now produce shoes and India would produce cloths due to their respective low opportunity costs.