Question

Explain this difference between absolute advantage and comparative advantage. If a country has an absolute advantage in everything, can it still benefit from trade? Why or why not?

Answer 1

Absolute advantage describes a scenario in which one entity/ country can manufacture a product at a higher quality and a faster rate for a greater profit than another competing business or country can accomplish. Comparative advantage differs in that it takes into consideration the opportunity costs involved when choosing to manufacture multiple types of goods with limited resources.

The differentiation between the varying abilities of companies and nations to produce goods efficiently is the basis for the concept of absolute advantage. Absolute advantage looks at the efficiency of producing a single product. This analysis helps countries avoid the production of products that would yield little or no demand, leading to losses. A country’s absolute advantage, or disadvantage, in a particular industry, can play an important role in the types of goods it chooses to produce.Comparative advantage takes a more holistic view, with the perspective that a country or business has the resources to produce a variety of goods. The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison. In general, when the profit from two products is identified, analysts would calculate the opportunity cost of choosing one option over the other.

If a country has absolute advantage in everything it can still benefit from trade because benefits depend on comparative advantage and not on absolute advantage.