The comparative and absolute advantages are some of the major concepts in international trade and in economics. They influence the way in which resources are devoted to production by nations. Absolute advantage refers to the difference in the abilities of the nation and the companies to produce goods efficiently. Nations use this analysis to gather information regarding those products that may not yield any benefit for the nation but rather may yield very little. The absolute advantage or disadvantage of the company in an industry can determines the type of goods it needs to produce to meet the customers need. For instance: both Italy and japan can produce automobiles but better quality cars with a higher profit margin can be earned by Italy and then it can be said that Italy has a competitive advantage over other countries belonging to the same industry. Comparative advantage takes place with a holistic view since under this concept it is believed that businesses or countries have all the necessary resources to produce variety of goods. The opportunity cost refers to those benefits that could have been earned by choosing the best possible alternative. This method is used when two products are beneficial and calculation will be done by the analyst in this case in order to choose one option over the other. For instance: Suppose Australia has sufficient resources with which it can produce either computers or smartphones. Australia can either prepare 20 computers or 20 smartphones with the same but it cannot produce both. From past analysis it has been found that smart phones yields higher profits as compared to computers. Therefore it can be said that in this case opportunity cost will be the cost of losing value that could have been got from the production of computers rather than a smartphone.
One example depicting the comparative advantage of a country is that America has a comparative advantage of innovation and creative thinking. Besides this, it has vast areas of land and it has two oceans in its surrounding. Therefore it has much arable land, fresh water and oil. Therefore businesses in America earn profits from selling natural resources at cheap prices and protection from any form of land invasion. One of the most important considerations is that the country has got diverse population that speaks a common language and there are different laws of the nation. The population of US that is diverse provides a wide market for testing new products. It is also one of the main reasons United States excels in providing consumer goods. The country also succeeded in becoming a global leader in all the different sectors such as aerospace, technology, equipment’s and others because of its diverse workforce. The country has been able to harness diversity for becoming a leader in innovative thinking. Another instance through which the concept of comparative advantage can be understood is that suppose XYZ and ABC are two companies engaged in the same business and belonging to the same industry. One company’s location is such that it can get its raw materials quite easily whereas the other is located in such a place where there is scarcity of raw materials. The company XYZ had to spend more money on delivery of the goods because it has to transport the raw material from other places whereas the company ABC gets all the raw materials easily and therefore this reason the company has a comparative advantage. ABC Company may not be carrying on its business more successfully than XYZ and in fact it may not be making goods of a better quality. Therefore these advantages came to the company due to the company’s access to cheaper material. Comparative advantage refers to the advantage of the company for producing goods at a much lower opportunity and marginal cost than others. Even when a country has an absolute advantage the countries still need to trade with other countries in order to gain from the same. Therefore in other others goods will be imported when the cost of locally producing goods is more than opportunity cost for importing. Allocation of the resources of the world takes place in a more effective way when comparative advantage is used for specialization. In case of international specialization, a country is capable of having more resources and therefore improving the techniques of production.
Therefore it can be said that comparative advantage is more important for any nation because even if a nation has an absolute advantage it still needs to reduce its opportunity cost to get a benefit. However, it is necessary to understand the difference between comparative and competitive advantage because competitive advantage refers to creating a better position in the minds of the customers in order to gain an advantage. Absolute advantage of a nation or a company or an individual refers to their ability to generate better results using the in form of goods, products or services using the same quantity of resources as are available to others. The concept was initially described in international trade context with labour as the only input. Sometimes it is also noticed that none of the parties involved in an international trade has any absolute advantage. For instance: if a company can produce a particular commodity in 8hours approximately and the same commodity can be produced by another company in 2hoours than the 2nd company is said to have an absolute advantage.
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