Which relationship best illustrates a comparison of absolute advantage?

Difference Between Absolute Advantage vs Comparative Advantage

Absolute Advantage is the country’s inherent ability that allows that country to produce specific goods efficiently and effectively 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 workforce, lesser time and lesser cost without compromising the quality. Comparative Advantage refers to the country’s capability to produce the specific good at lower marginal cost and opportunity cost compared to other countries. In absolute advantage where the emphasis is only on marginal cost, comparative advantage considers both marginal and opportunity cost.

Example of Absolute Advantage

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

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

Example of Comparative Advantage

Let’s take the example of 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.

Opportunity Cost of Production

• 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 comparative advantage concept, Country 1 should produce computers, and Country 2 should produce cars to optimize their cost.

Absolute Advantage vs Comparative Advantage (Infographics)

Below is the top 8 difference between Absolute Advantage vs Comparative Advantage

Key Differences Between Absolute Advantage vs Comparative Advantage

Both Absolute Advantages vs Comparative Advantage are popular choices in the market; let us discuss some of the major Difference

• Both Absolute advantages vs Comparative advantage are important concepts of international trade that help countries make decisions on domestic productions of goods, resource allocation, import, export, etc.
• The Absolute Advantage is the country’s inherent ability to produce specific goods efficiently and effectively at a relatively lower marginal cost. However, Comparative Advantage refers to the country’s capability to produce the specific good at lower marginal cost and opportunity cost.
• The absolute advantage concept is based on a lower marginal cost of production of a specific good. However, comparative advantage deals with the lower opportunity cost of production of a specific good compared to competitor Country.
• Countries with an absolute advantage of producing a good focus on maximizing production with the same available resources. However, Countries with comparative advantage take into account the production of multiple goods in the country while deciding the production of a specific good and resource allocation.
• The comparative advantage concept is more effective in helping countries in the decision-making of resource allocation, production, and trade compared to absolute advantage.
• Trades transactions between countries having the absolute advantage are not mutually beneficial in nature. Trades decisions based on comparative advantage are mutually beneficial in nature.
• Absolute advantage may not be very effective and beneficial for the economy as it focuses on maximizing production without considering the opportunity cost of production. However, comparative advantage is more effective in helping Countries taking decisions related to resource allocation, domestic productions, and import/export of goods.

Absolute Advantage vs Comparative Advantage Comparison Table

Below is the topmost comparison between Absolute Advantage vs Comparative Advantage

Conclusion

The concept of Absolute Advantage vs Comparative Advantage is related to economics and trade which helps countries make logical decisions on resource allocation for the production of specific goods, import and export of goods while considering the marginal cost and opportunity cost of producing goods. Absolute advantage focuses on the marginal cost of producing a good, whereas comparative advantage specifically focuses on the opportunity cost of production. Trade decisions based on comparative advantage between countries are always mutually beneficial. Comparative advantage helps in more effective decision-making for countries for resource allocation and production hence more beneficial for economies than an absolute advantage.

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