Absolute advantage vs comparative advantage: Economics forms a rich collective knowledge on how little resources are utilized by humans as they strive to survive in this competitive world. Theories and concepts in absolute and comparative advantage are very important in explaining various world economies. These have a huge impact on different countries and determine how nations engage in trade or business as they try to utilize their scarce resources to enjoy maximum profits in their economies. So what is the meaning of absolute and comparative advantage? Absolute advantage simply implies that an economic unit, firm or country is able to produce a certain commodity or product more efficiently with fewer production costs, quickly and of a higher standard than that of another competitor either locally or internationally. A country is said to have an absolute advantage over another if the number of a given commodity being produced is greater for the same amount of resources. The involved economic should, therefore, utilize its scarce resources on the production of commodities it best can produce. On the other hand, comparative takes the view of the firm, country or any other economic unit taking into consideration the cost of the foregone known as opportunity cost when determining between two products to be produced. A country or firm may thus have the ability to produce two goods but consideration on opportunity costs must be evaluated before production to ensure profits are realized. The differences between absolute and comparative advantage include:
What is the Difference between absolute advantage and comparative advantage?
1. Absolute advantage considers the cost of a single commodity but comparative advantage analysis opportunity costs:
Absolute advantage takes the view of an economic unit says, for example, a country, being able to produce a given commodity better than another while for comparative advantage opportunity costs must be considered for a firm or country that has the ability to produce two or more different commodities. Comparative advantage strong point is that goods or services must be produced at a lower opportunity cost.
2. Absolute advantage focuses on a single commodity while the comparative advantage is based on multiple commodities:
In absolute advantage, the country focuses on the reduction of production costs of a single identified commodity hence efficiency while for comparative advantage various or multiple commodities which can be preeminently produced best may be considered. If multiple goods are produced, the producers must, therefore, understand the demand of each commodity in the market as well as opportunity costs to avoid any possible losses.
3. In absolute advantage there is no mutual economic when compared to comparative advantage: There is usually a mutual benefit between the two countries or firms as each of them is producing the best of its commodity but for comparative advantage, a mutually important trade may exist between the two firms or units involved. A country may thus choose to increase the production of a certain commodity based on the reflection of the production of the other foreign country after determining which commodity is in greater demands than the other. Take the instance of comparative advantage whereby a country that produces 5000 shoes per hour and 1000 hats per hour when compared to that of another country that can produce 1500 shoes per hour and 3500 hats per hour. The county producing more hats can export to the one producing fewer hats and in reverse the other country exports shoes.
4. Absolute advantage largely encourages specialization only on a single commodity when compared to comparative advantage:
For absolute advantage a county or firm will specialize on the product it can produce better but for comparative advantage, both countries can actually try to expertize their skills in producing the same multiple goods and services only that their amount of production may vary.
5. Higher quality commodities may be produced for absolute advantage compared to comparative advantage:
Due to the increased specialization of production of a certain single commodity the output quality is occasionally higher.
6. Less losses may be incurred for absolute advantage than in comparative advantage:
In comparative advantage, failure to accurately and successfully identify opportunity cost may lead to the production of a commodity with fewer profits. Demand and supply chains for all commodities must also be studied to fully understand the market else losses are incurred for comparative advantage. However in most cases for absolute advantage, there is only one commodity to concentrate in.
7. Comparative advantage is reciprocal in nature while the absolute advantage is not:
In absolute advantage, all the involved countries or firms produce large amounts of commodities opposite to comparative advantage where each country has a commodity that it produces more efficiently than the other.
8. Comparative advantage is largely affected by changes in demand and supply chains for commodities than absolute advantage:
This is because the comparative advantage is based on opportunity costs when choices between multiple goods or services are made. If the cost of production suddenly increases or the demand goes against the projected trend, this will strongly impact the economy for comparative advantage than in absolute advantage. It is also worth noting that in most cases comparative advantage is exhibited in instances when two goods have almost the same opportunity costs.
9. Comparative advantage is largely affected by trade barriers in instances where there are mutual agreements than in absolute advantage:
Since comparative advantage is mutual and reciprocal in nature, any disagreements or trade warfare that can arise can a stir in the economies of the countries or firms involved which is not the case for absolute advantage.
10. Specialization in comparative advantage ensures more satisfaction than absolute advantage:
However it also important to note that if specialization is applied extensively for comparative advantage both countries are able to produce and satisfy their needs for both commodities which are not possible for absolute advantage as there may lack mutual trade associations between the two countries.