Absolute Advantage vs Comparative

Advantage
Article by Reviewed by
Ashish Kumar Srivastav Dheeraj Vaidya, CFA, FRM

Differences Between Absolute and

Comparative Advantage
Absolute advantage is the ability to produce an increased number of
goods and services at better quality than competitors. In contrast,
Comparative Advantage signifies the ability to manufacture goods or
services at a relatively lower opportunity cost.

In International trade, absolute advantage and comparative advantage are

widely used terms. These advantages influence the decisions taken by the
countries to devout their natural resources and produce specific goods.

Table of contents

Differences Between Absolute and Comparative Advantage

Absolute Advantage

Comparative Advantage

Absolute Advantage vs Comparative Advantage Infographics

Key Differences

Absolute vs Comparative Advantage Comparative Table

Example

Conclusion

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

Few examples 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 the climatic advantage of producing coffee. Thus, it can

produce coffee at a lower cost than other countries

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Comparative Advantage
Comparative advantage is based on the opportunity cost of producing a
good. Suppose a Country can produce a particular good at a lower

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 opportunity cost (by losing an opportunity to produce other goods) than
any other country. In that case, it is said to have a comparative advantage.

Few examples of comparative advantage are:

Suppose the US and Japan can produce wheat or rice but not both.
The US could produce 30 units of wheat or ten units of rice, and Japan
could produce 15 units of wheat or 30 units. Thus, the opportunity
cost of wheat is three 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 in rice production since it has a
lower opportunity cost.

Absolute Advantage vs Comparative

Advantage Infographics
Let’s see the top differences between absolute vs comparative
advantages.

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Key Differences
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 lower price than
another country.

There is no mutual benefit in absolute trade-in advantage whereas the

trade is mutually benefited with comparative advantage. The country
with a higher opportunity cost of producing a good can 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 that determines if the country
has a comparative advantage.

Comparative advantage is mutual and reciprocal whereas absolute

advantage is not.

Absolute vs Comparative Advantage

Comparative Table
Basis Absolute Advantage Comparative Advantage

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 Basis Absolute Advantage Comparative Advantage

The ability of a country to produce The ability of the country to produce

Definition more goods with the same amount goods better than another country
of resources than another country with the same amount of resources

1. Trade is not mutually beneficial

1. Trade is mutually beneficial
Benefits 2. Benefits the Country with
2.Benefits of both the countries
absolute advantage

The absolute cost of producing The opportunity cost of producing

Cost goods impacts if the country has an goods impact the Country’s
absolute advantage comparative advantage

Economic
It is not mutual and reciprocal It is mutual and reciprocal
Nature

Example
Consider two countries, A and B, which have the 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 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.

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 Similarly, Country A has an opportunity cost of 0.5 units of 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, it has an absolute advantage since Country A can produce
both Corn and Maize higher than Country B.

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 decide which goods they should produce and drive the
trade. Comparative advantage drives specialization in producing
goods in a country as they have a lower opportunity cost and thus
lead to higher production and better efficiency.

Conclusion
It should be understood that while the theoretical differences between
absolute and 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 exclusive overproduction of
goods. Many factors drive the manufacturing and production of goods,
making certain goods more efficient in some nations. A nation can
produce some goods efficiently but may not transport and market them in
other countries. Hence, these both could be better understood when
countries have equal resources.

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Comparative Advantage
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 This has been a guide to the Absolute Advantage vs. Comparative
Advantage. Here we discuss the top differences between Absolute and
Comparative Advantage and infographics and a comparative table. You
may also have a look at the following articles –

Floating Exchange Rate

Examples of Comparative Advantage

Manufacturing vs Production

Opportunity Cost Calculations

Monopoly vs Oligopoly

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