Differences between Comparative Advantage and Absolute Advantage
Introduction
An advantage in the economical scenario refers to the situation where one or a group can produce a given output in a particular economy than the other. A comparative advantage is the condition in a country, an individual, or a region to produce a given product at relatively lower cost than its competitor. Whereas the absolute advantage is the capacity of an individual, country, a firm or a region o produce a service or good at a lower cost per unit than that at which any other entity can produce the same good or service.
Differences Between Comparative Advantage And Absolute Advantage
In comparative advantage the production can be executed at a lower cost of production. This can only occur given that other factors of production such as the amount of capital are held constant. While in the absolute advantage, a multiple products and factors are considered. For instance, at a constant production point g, a given firm may have an absolute production of a given product h, over another different firm.
Considering the comparative type of advantage, the difference in trade arises from the substitution ratios for a particular product to another and when one is greater than other then it as deduced that the greater one has a higher comparative advantage. And when labor is divided amongst the individuals in a firm, then this concept is well pronounced. But in absolute advantage, all factors are taken into account and this includes the quantity that when engaged against the number and the input cost, it is realized to be cheaper.
Comparative advantage on consolidation using two kinds of goods on the reasoning of the relative cost realized on the production of an additional unit in two different products, the commodity that is higher has a greater comparative advantage and therefore goes in unison advantage. The division of labor is a typical example. The absolute advantage alternatively engages several factors of production not only labor but even capital and land or rent. Comparative advantage aims at maximizing its production while maintaining lower input costs as a routine and as a formality. While absolute advantage may involve in maximization of output at very lower costs of production to with a sole aim of maximizing its profits
Importance of Comparative and Absolute Advantage to the Economy
The comparative advantage promotes division of labor which in turn facilitates the specialization. This improves the quality of personnel. The highly specialized manpower enhances the quality of a country’s products which can then be exported for economic gains. A country gets to know the commodity it has to produce and the product it has to obtain through trade. Absolute advantage enables a country to produce a given product at a lower cost than the other, comparative advantage enables one firm to gain from another and this facilitates trade in the country. This therefore empowers the economy by enhancing the trade. Absolute advantage, by aiming at production at lower costs per given unit than other firms, it maximizes its profits. At higher profits a firm pays a higher amount of revenue in form of tax. The taxes levied on such firms provide a good source of government finance.
The absolute and the comparative advantages, by so targeting their productions above the other firms, regions, or groups, they increase their aspect of competition in an individual system. The competition within a country and its regions attributes to full capacity utilization of the available resources and ensure maximum aggression in acquisition of such resources. This in turn ensures the business in every production level and sectors. Such involvements of individuals accounts to the employment among the citizens. In unison these advantages therefore leads to economic development as the citizens’ living standards are boosted.
Specialization is vital as it creates an avenue for much yield in output. This in turn allows for an effective room for exchange as there is the availability of all the resources and tools that aids in an effective exchange. With such a change, it boosts the trade in the country. Therefore profits are maximized and a total economic growth.
The specialization focuses on a more observation and enhancement of creativity. It therefore majors on executing improvements, both on ideas and more precisely on the improvement of the quality and the quantity of the products. The main impact of this is inculcation of openness of thoughts, practice and wider openness of the exchange gates, the country can therefore obtain foreign exchange.
Specialization provides a wider range of products for the consumers. This attracts a greater number of customers from other countries as the greater range of products. In this context it improves the country’s reputation and in turn boosts the cost of the country’s currency in the global market. This improves the foreign gains, a total benefit to the country’s economy.
References
Hall, R. E. Lieberman, M. (2007).Microeconomics: Principles and Applications. Stamford Connecticut: Cengage Learning.
Case, K.E., Fair, R.C. (2008).Principles of economics. New Jersey: Prentice Hall.
Mankiw ,N. G. (2008).Essentials of Economics Edition5, Stamford Connecticut: Cengage Learning.
