A country has an absolute advantage over another in producing a good, if it can produce that good using less resources
than another country. For example if one unit of labor in Scotland can produce 80 units of wool or 20 units of wine; while in
Spain one unit of labor makes 50 units of wool or 75 units of wine, then Scotland has an absolute advantage in producing wool and
Spain has an absolute advantage in producing wine. Scotland can get more wine with its labor by specializing in wool and trading
the wool for Spanish wine, while Spain can benefit by trading wine for wool. (Adam Smith, Wealth of Nations, Book IV,
Ch.2.) The benefits to nations from trading are the same as to individuals: trade permits specialization, which allows resources
to be used more productively.
The principle of comparative advantage, generally attributed to David Ricardo in his 1817 Principles of Political Economy
and Taxation, extends the range of possible mutually beneficial exchanges. It is not necessary to have an absolute advantage
to gain from trade, only a comparative advantage. This means that one need only to be able to make something at a lower cost, in
terms of other goods sacrificed, to oneself to gain from trade.
The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo
do not hold where the factors of production are internationally mobile.[1] [2]
Limitations to the theory may exist if there are single kind of utility. The very fact that people want food and shelter
already indicates that multiple utilities are present in human desire. The moment the model expands from one good to multiple
goods, the absolute may turn to a comparative advantage. However, pure labor arbitrage, where one country exploits the cheap
labor of another, would be a case of absolute advantage that is not mutually beneficial.[3]
The two concepts have applications outside international trade, though this is where they are most commonly used. Suppose that
two castaways on a desert island gather both fruit and grain, which they then share equally between them. Suppose that Castaway A
can gather more fruit per hour than Castaway B, and therefore has an absolute advantage in this good. Nonetheless, it may well
make sense for A to leave some fruit-gathering to B. This is because it is possible that B gathers fruit slightly slower than A,
but gathers grain extremely slowly.
One needs to look at comparative advantage rather than absolute advantage, to discover how A and B can each best allocate
their effort. If A's initial advantage over B in grain-gathering is greater than his or her advantage in fruit-gathering, then
fruit-effort should be transferred from A to B, to the point where A's comparative advantages in the two goods are equal. Thus it
may be rational for fruit to flow from B to A, despite A's absolute advantage.
Examples
Example 1
Country A can produce product z using one unit of labour.
Country B can produce product z using two units of labour.
Country A has an absolute advantage over Country B in product z.
Example 2
Kentucky has significant coal reserves.
Illinois does not and uses nuclear energy.
Assume that energy production is cheaper with coal than with nuclear energy.
Kentucky has an absolute advantage in energy production.
Notes
- ^ Roberts, Paul Craig (August 7, 2003). Jobless in the USA
Newsmax. Retrieved on May 6, 2007.
- ^ Hira, Ron and Anil Hira with forward by Lou Dobbs, (May 2005). Outsourcing
America: What's Behind Our National Crisis and How We Can Reclaim American Jobs. (AMACOM) American Management Association.
Citing Paul Craig Roberts, Paul Samuelson, and Lou Dobbs, pp. 36-38.
- ^ See Roberts, Loc. cit.
See also
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