Absolute Advantage and Comparative Advantage: Similarities and Differences
Absolute advantage is manifested in a country’s ability to produce goods using fewer resources than other countries. Сomparative advantage refers to a country’s ability to manufacture some products at a lower cost than others.
Absolute advantage and comparative advantage are elements of trade theory, which explains the mechanisms of world trade. The difference between absolute advantage and comparative advantage is most easily shown by real examples taken from actual countries. An example of absolute advantage is the production of oil by Saudi Arabia, one of the leaders in this area due to its geographical location. Oil is a plentiful and easily accessible resource in this country, so the government does not spend much money or time extracting this product. In contrast, although Colombia is not known for its oil production, its absolute advantage is the climate for growing coffee.
However, it is necessary to mention the idea of interdependence between countries to explain what comparative advantage is, and how it differs from absolute advantage. For instance, Saudi Arabia produces a barrel of oil in one hour, but it takes 10 hours to collect a ton of coffee. Colombia, at the same time, produces a ton of coffee in 5 hours, but it takes 12 hours to obtain a barrel of oil. If both countries want to produce both goods, then they need to distribute time in the most profitable way. For example, working 120 hours per month, Saudi Arabia can produce 60 barrels of oil and 6 tons of coffee, and Colombia can produce 5 barrels of oil and 12 tons of coffee. Thus, the cost of one ton of coffee for Saudi Arabia is 10 barrels of oil, while in Colombia, one barrel of oil costs 60 tons of coffee.
This is not the most economical option for either country. It’s better for Saudi Arabia to buy coffee and make oil, which is easier and faster for it to produce. This is known as comparative advantage, or the practice of manufacturing goods at a lower cost than other products and selling them to countries with different specializations. However, comparative advantage has problems associated with volatility of supply and demand. In general, a country’s specialization influences the market, but it can be difficult to change in the short term.
Examples from everyday life can also explain the theory of advantage. For instance, two students have to prepare a project and present it to their class. The absolute advantage of one student is his ability to write well. He can finish the text in a couple of hours, but he does not know how to use PowerPoint. The other student does not like to write but knows how to make visual presentations, and two hours is enough for her to complete the assignment. If they work alone, then they both spend the whole day on the project. However, if they combine their efforts, they will only spend a few hours finishing the project. Consequently, the comparative advantages of both students are based on the use of their absolute advantage to create alternative value, which is the basis of trade theory.