Economics | Absolute Advantage vs. Comparative Advantage | #economics

Countries trade with each other based on what gains they can get from the trade and what product they can produce with the least opportunity costs. That's the cornerstone of economics of international trade which was first discovered by Ricardo. We use the notions of absolute advantages and comparative advantages in international economics to show based on opportunit what sort of production the country, the firm or the person is efficient at. | #economics

International Economics | Absolute Advantages vs. Comparative Advantages in Economics

Opportunity Costs in International Economics

In international economics, we operate with the term opportunity costs to show whether it is more efficient to produce or to import a certain type of product. If the country encounters more opportunity costs producing a product than importing it, the country should import it. The inverse is true in case importing a product is more expensive in terms of opportunity costs than producing it inside the country.

The terms absolute advantages and comparative advantages  have been coined by Ricardo in his famous work The Wealth of Nations. In that work Ricardo creates the simplest model of international trade to which we shall further refer to as the Ricardian model. It shows how differences between countries nourish trade and gains from trade. In that model, labour is the only factor of production, and countries differ only in their productivity of labour in different industries.

According to the Ricardian model, countries will export goods that their labour produces relatively efficiently – with small opportunity costs - and will import goods that their labour produces relatively inefficiently incurring larger opportunity costs. Thus, the country’s trade patterns are influenced by its absolute advantages and comparative advantages.

Absolute Advantages 

A country has an absolute advantage in producing a certain type of product if it is more efficient in terms of producing that partikular particular type of product than the other country.

Comparative Advantage

A country has a comparative advantage in producing a certain product if the opportunity cost of producing it as opposed to other products is lower in that country than it is in other countries.