Absolute Advantage vs Comparative Advantage Differences

In an International trade, absolute advantage and comparative advantage are widely used terms.
Absolute vs comparative advantage influence the decisions taken by the Countries to devout
their natural resources and produce specific goods

What is Absolute Advantage?

Absolute advantage is when a Country can produce particular goods at a lower cost than another
country.

Few examples of absolute advantage are:

 It is easier to extract oil in Saudi Arabia than in any other country. The abundance of oil
in Saudi Arabia makes it easier as if it’s only drilling an oil whereas for other countries it
involves exploration and drilling cost.
 Colombia has climatic advantages for producing coffee. Thus, it can produce coffee at a
lower cost than other countries

What is Comparative Advantage?

Comparative advantage is based on the opportunity cost of producing a good. If a Country can
produce a particular good at a lower opportunity cost (by losing an opportunity for production of
other goods) than any other country then it is said to have a comparative advantage.

A country like India has a huge comparative advantage compared to the western country in terms of the
outsourcing industries. Since India has a huge population of young educated English speaking
population, this acts as an advantage to provide scale and price competitiveness which results in a lot of
work being outsourced in India.

Oil producing countries like countries which are part of OPEC has a comparative advantage for
producing a lot of chemicals. As a lot of chemicals are by-products of crude oil for which they have huge
reserves. So a country which is producing crude has a comparative advantage over a country which is
not producing crude in terms of manufacturing chemicals.

If the US and Japan have an option to produce wheat or rice but not both. The US could produce 30
units of wheat or 10 units of rice and Japan can produce 15 units of wheat or 30 units of rice. Thus, the
opportunity cost of wheat is 3 units of wheat for 1 unit of rice for the US whereas 0.5 units of wheat for
each unit of rice for Japan. Thus, Japan has a comparative advantage on the production of rice since it
has a lower opportunity cost.
Absolute Advantage vs Comparative Advantage – Key Differences

The key differences between Absolute Advantage vs Comparative Advantage are as follows –

 A country has an absolute advantage if it produces a large number of goods with the same
resources as provided to another country whereas the Country has a comparative
advantage if the Country can produce a particular product with better quality at a cheaper
price than another country.
 There is no mutual benefit in trade in absolute advantage whereas the trade is mutually
benefitted with comparative advantage. This is because the Country which has a higher
opportunity cost of producing a good can now receive it at a lower cost from the
production of another country.
 Cost is a factor to determine if the country has an absolute advantage whereas
opportunity cost is a factor which determines if the country has a comparative advantage
 Comparative advantage is mutual and reciprocal whereas absolute advantage is not.

Let’s now look at the head to head difference between Absolute Advantage vs Comparative
Advantage

Basis –
Absolute vs
Absolute advantage Comparative Advantage
Comparative
Advantage
The ability of a country to produce The ability of the country to produce
Definition more goods with the same amount good better than another country with
of resources than another country the same amount of resources
1. Trade is not mutually beneficial
1. Trade is mutually beneficial
Benefits 2.Benefits the Country with
2.Benefits both the countries
absolute advantage
The absolute cost of producing The opportunity cost of producing goods
Cost goods impacts if the country has an impact the Country’s comparative
absolute advantage advantage
Economic
It is not mutual and reciprocal It is mutual and reciprocal
nature
Example of Absolute and Comparative Advantage

Let us try to understand the difference between absolute advantage vs comparative advantage
with numbers and the following example:

Consider two countries A and B which have following dynamics for the production of maize and
corn. The output for an equal number of resources per day is as below:

MAIZE CORN
COUNTRY A 30 15
COUNTRY B 5 10

 For Country A the opportunity cost of producing 15 units of corn is 30 units of Maize or
we can say the Country A has an opportunity cost of producing 1 unit of corn to 2 units
of maize. Similarly, country B has the opportunity cost of producing 1 unit of corn to 0.5
units of Maize. Since the opportunity cost of producing corn in country B is less, it has a
comparative advantage.
 Similarly, Country A has an opportunity cost of 0.5 units corn to produce 1 unit of maize
and country B has an opportunity cost of 2 units of corn to produce 1 unit of maize. Thus,
country A has a comparative advantage over country B in the production of Maize.
However, since Country A can produce both corn and maize higher than Country B, it
has an absolute advantage.
 Thus, if Country A produces and trades Maize while country B produces and trades Corn
both the countries will benefit from the trade with lower opportunity costs and higher
efficiency.
 In the above example, we have seen that even if A has an absolute advantage in
producing all the goods a different country can have a different comparative advantage.
Comparative advantage helps the countries to decide which goods they should produce
and drive the trade. Comparative advantage drives specialization in the production of a
good in a country as they have a lower opportunity cost and thus leads to higher
production and better efficiency.

It should be understood that while the theoretical differences between absolute vs comparative
advantage are easy to understand but practically it is more complex. No nation has an advantage in
the production of each good also no nation has exclusivity overproduction of goods. There are many
factors which drive the manufacturing and production of goods which makes the production of
certain goods more efficient in some nations. A nation can produce some goods efficiently but may
not be able to transport and market them in other countries. Hence, absolute advantage vs
comparative advantage could be better understood when the countries have on equal resources.
Difference Between Absolute Advantage vs Comparative
Advantage
Absolute Advantage is the inherent ability of a country that allows that country to produce
specific goods in an efficient and effective manner at a relatively lower marginal cost. A country
has an absolute advantage in producing a good if it can produce that good at lower marginal cost,
lesser manpower, lesser time and lesser cost without compromising the quality. Comparative
Advantage refers to the country’s capability of producing the specific good at lower marginal
cost and opportunity cost in comparison to other countries. In absolute advantage where the
emphasis is only on marginal cost, comparative advantage takes into account both marginal and
opportunity cost.

Example of Absolute Advantage

Let’s take the example of two countries (Country 1 and Country 2), which are in the
manufacturing of cars. Assuming County 1 produces 3 cars per hour with 10 employees and
Country 2 produces 5 cars with 10 employees.

Countries Production of Cars/Hour No of Employees

So in this case, Country 2 has an absolute advantage over Country 1 as Country 2 can produce a
number of cars per hour than County 1 with the same number of employees.

Example of Comparative Advantage:

Let’s take an example Country 1 and Country 2. Country 1 can produce either 10 cars or 20
computers whereas Country 2 can produce 22 cars or 30 computers with available resources.

Product Country 1 Country 2

Product Country 1 Country 2

 The opportunity cost of producing 1 unit of the computer is higher for Country 2 than
Country 1 and opportunity cost for producing 1 unit of a car is lower for country 1 than a
country
 According to the concept of comparative advantage, Country 1 should produce computers
and Country 2 should produce cars to optimize their cost.