Comparative Advantage vs Absolute Advantage

Similarities between Absolute Advantage and Comparative Advantage

While the two concepts are not necessarily against each other, there are only two significant similarities between absolute advantage and comparative advantage. Let's describe them.

1. Both absolute advantage and comparative advantage are aimed at increasing output. Absolute advantage aims to increase output domestically by producing a good the country is most efficient in. Comparative advantage also aims to increase national output by combining both domestic production and imports.
2. Both concepts can be applied to individuals, businesses, or economies as a whole. The concepts of absolute advantage and comparative advantage apply to all economic agents due to the concept of scarce resources and the need to maximize the benefits from these resources.

Absolute Advantage vs. Comparative Advantage Calculation

The calculation of absolute advantage vs. comparative advantage is different, with the comparative advantage being slightly more complex. For absolute advantage, we simply need to compare the quantities of output, and the country with the larger quantity wins the absolute advantage. However, comparative advantage is calculated by finding the opportunity cost for each country, and the country with the lower opportunity cost wins the comparative advantage.

The following formula is used to find the opportunity cost of producing a good in terms of another good.

Let's say the two goods are Good A and Good B:

\(\hbox{Opportunity Cost of Good A}=\frac{\hbox{Quantity of Good B}}{\hbox{Quantity of Good A}}\)

Remember, for absolute advantage, you look for the higher quantity of output, whereas for comparative advantage, you calculate and find the lower opportunity cost.

Comparative Advantage and Absolute Advantage Analysis

Let's perform an analysis of comparative advantage and absolute advantage using an example. We will do this with two countries: Country A and Country B. These countries can produce different combinations of coffee and rice, as shown in Table 1 below.

Table 1. Production Possibilities Between Two Countries

Now, we can draw the production possibilities curves for both countries using the following:

• Country A can produce 5,000 bags of coffee or 1,000 bags of rice;
• Country B can produce 500 bags of coffee or 4,000 bags of rice;

Take a look at Figure 1 below.

Fig. 1 - Production possibilities curves example

First, we can see that Country A has the absolute advantage in coffee production since it can produce up to 5,000 bags against Country B's 500 bags. On the other hand, Country B has the absolute advantage in rice production since it can produce up to 4,000 bags against Country A's 1,000 bags.

Next is comparative advantage. Here, we will calculate opportunity cost using the formula:

\(\hbox{Opportunity Cost of Good A}=\frac{\hbox{Quantity of Good B}}{\hbox{Quantity of Good A}}\)

We will now calculate the opportunity cost for both countries by assuming they will focus on the production of only one product. Let's calculate it for coffee first!

From the analysis above, Country A has a comparative advantage in the production of coffee since it has a lower opportunity cost of 0.2 when compared to the opportunity cost of Country B, which is 8.

This time, we will find the opportunity costs of producing rice.

The analysis above shows that Country B has a comparative advantage in the production of rice since it has a lower opportunity cost of 0.125 when compared to the opportunity cost of Country A, which is 5.

All in all, we can see that country A has the absolute advantage and comparative advantage in producing coffee, whereas Country B has the absolute advantage and comparative advantage in producing rice.

Absolute Advantage vs. Comparative Advantage Example

An example of a country with a comparative advantage over other countries globally is Ireland. Ireland has a comparative advantage in the production of grass-based milk and meat compared to other countries around the world¹.

Indonesia has a comparative advantage in charcoal production compared to the rest of the world, as it is the largest global supplier of charcoal, with the highest surplus in 2021⁴.

The Democratic Republic of Congo currently has a comparative advantage with the highest surplus recorded in tin production compared to the rest of the world⁵.

Japan also has a comparative advantage in automotive manufacturing compared to other countries globally². Note that this does not mean that other countries will not produce some of these products; however, they are likely to import more than they produce domestically. Japan's comparative advantage in exporting cars is illustrated in Figure 2 below, which shows the top ten car exporters in the world³.

Fig. 2 - Top ten car exporters in the world. Source: World's Top Exports³