Absolute and Comparative Advantage

Absolute advantage means producing a good with fewer inputs, or producing more of it with the same inputs, than another country. Comparative advantage means producing a good at a lower opportunity cost, measured by the amount of another good forgone.

Basis of the distinction

• Associated with Adam Smith, absolute advantage compares countries' physical productivity or resource cost in producing the same good.
• Associated with David Ricardo, comparative advantage compares the relative opportunity costs of producing different goods within each country.
• Absolute advantage identifies the more efficient producer, whereas comparative advantage determines the economically beneficial pattern of specialization and trade.
• A country may lack absolute advantage in every good but can still export the good in which its relative disadvantage is smaller.

How comparative advantage creates gains

Trade allows each country to specialize relatively more in the good for which it has the lower opportunity cost and exchange part of its output. When the international exchange ratio lies between the countries' domestic opportunity-cost ratios, both can consume beyond what their resources and technology would otherwise permit.

• Gains arise from differences in relative costs, not necessarily from differences in absolute productivity.
• Comparative advantage explains why trade may benefit even a technologically superior country and a less productive country.

Simple illustration

Suppose one worker in Country A can produce either 10 units of steel or 5 units of cloth, while one worker in Country B can produce either 6 units of steel or 4 units of cloth. Country A has an absolute advantage in both goods, but its opportunity cost of one steel unit is 0.5 cloth, compared with about 0.67 cloth in Country B. A therefore has comparative advantage in steel, while B has comparative advantage in cloth, because B sacrifices fewer steel units per cloth unit.