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Definition of absolute advantage .. and the difference between it and comparative advantage

What is the absolute advantage

Absolute advantage is where a nation is more efficient in making a product than others, in other words it takes fewer resources to make a final good or service, e.g. Brazil has an absolute advantage in making coffee beans due to its location near the equator, local climate and experience, it is able to Efficient production of coffee beans making it the largest producer in the world.

Indonesia is a big producer of coffee beans, however the quality of its coffee beans is said to be inferior to that of Brazil at least depending on the tastes so there is a quality component to consider although Indonesia may be able to produce cheaper coffee beans, it does not mean that it has an absolute advantage, In other words a nation can have an absolute advantage only if we compare it with similar products.

What is comparative advantage

Comparative advantage evaluates the ability of a company or a country to manufacture a product according to profit and cost, but it also takes into account the opportunity costs involved in manufacturing products with limited resources, opportunity costs are the benefits that one party loses when choosing one option over another, by including opportunity costs Alternatively, comparative advantage can take a more comprehensive approach to assessing a country's ability to manufacture goods.

Professionals working in international trade may use comparative advantage assessment to determine which country may produce a product at the lowest opportunity cost and thus have a higher comparative advantage against its closest competitors, a comparative advantage calculation may encourage countries to consider trade with each other, which may have positive effects All countries involved, for example, engaging in trade with other countries can also create job opportunities and help diversify the country's workforce by introducing new professional roles.

An example of absolute advantage

When a country has an absolute advantage, it is more efficient in producing the same good, given similar levels of quality, e.g. you can't compare a cheap iPhone with an official one, let's now look at a real-world example of absolute advantage:

If we look at wine production we find that Italy is the largest producer, followed by France and Spain now, when we compare Italy to countries like Norway, Finland and the United Kingdom we see that it has an absolute advantage in wine production but why is that the case.

It is indisputable that Italy is better at producing wine than those in colder climates like Finland in terms of quality and quantity, and the reason for this is largely due to the climate. Although it is not impossible to grow grapes in Finland, the cost and effort involved It would make it economically unviable.

Artificial lighting would be required, as well as special compost. Growing grapes and wine in such climates is fighting nature which makes such a costly endeavor, yet the climate is only one part of Italy's advantage in wine production.

Although the Italian climate is perfect for producing wine the right mix of sunlight and rain it also has a historical element, they have been producing wine for over 4000 years, so experience and knowledge have been passed down for generations so helpful advice on efficiency and production will inevitably flow to advantage competitive.

Then we have the fact that wine production is simply a preferred occupation for many in Italy due in part to the influence of generations as the land is passed down from generation to generation however, it is also due to the favorable climate, grapes can be grown almost anywhere in Italy and will grow and this in turn stimulates farmers.

These three factors, climate, historical influence, and incentives come together to help create an absolute advantage for Italian wine production.

The difference between absolute advantage and comparative advantage

Absolute advantage occurs when a country is able to produce a good at a lower cost than another, in contrast comparative advantage means that the opportunity cost of one country is lower to produce a good over another, in other words it is relatively more efficient when we look at other goods in the equation .

For example, China may have an absolute advantage in making electronic components, which they can produce at a lower cost than France. However, when we also think about manufacturing cars , we may find that France does have a comparative advantage in making electronic components.

If France were to give up Fiores to make an electronic component, they have a comparative advantage - that is, when we compare them to China, so China will have to give up more cars in order to make an electronic component. [1]

Key Differences Between Absolute Advantage and Comparative Advantage

Absolute vs. Comparative Advantage are both popular options in the market, so let's discuss some of the key differences:

  • Both absolute advantages versus comparative advantage are important concepts of international trade that help countries to take decisions regarding domestic production of goods, resource allocation, import, export, etc.
  • Absolute advantage is the inherent ability of a country to produce a specific commodity efficiently and effectively at a relatively lower marginal cost, however comparative advantage refers to a country's ability to produce a particular commodity at lower marginal cost and opportunity cost.
  • The concept of absolute advantage is based on the low marginal cost of producing a particular good, however comparative advantage deals with the opportunity cost of producing a particular good as compared to the competing country.
  • Countries with absolute advantage in producing well focus on maximizing production with the same available resources, however countries with comparative advantage take into account the production of multiple commodities in the country while determining the production of a particular commodity and the allocation of resources.
  • The concept of comparative advantage is more effective in assisting countries in making decisions regarding resource allocation, production and trade than absolute advantage.
  • Trade transactions between countries with absolute advantage are not of a mutually beneficial nature and trade decisions based on comparative advantage are mutually beneficial in nature.
  • Absolute advantage may not be very effective and beneficial to the economy because it focuses on maximizing production without considering the opportunity cost of production, yet comparative advantage is more effective in helping countries to take decisions regarding resource allocation, domestic production and import/export of goods.

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