Two key parameters that are taken into consideration while taking crucial decisions related to international trade are Absolute advantage and Comparative advantage. These decisions largely revolve around factors that influence or drive a particular nation towards the production of a particular type of good.
Absolute Advantage is the particular condition or circumstance that exists in a country that enables it to produce a good at a comparative lower cost that the other countries. This advantageous condition could be environmental, skill based, natural resources based etc. but it is the amalgamation of these factors that works in favor of the country and enables it to produce a particular good at a lower cost than the other countries. For example the climatic condition of a particular country may be conducive in producing large quantities of a particular type of a crop. Due to the prevailing climatic condition the cost of producing this crop would be much lesser in this country as compared to any other country. This gives this country an Absolute advantage over other countries. Another example could be of a nation that has the technical expertise and skilled manpower in producing a particular type of automobile. This would definitely enable the country to produce the automobile at much lesser cost than any other country. Thus Absolute advantage exists when one country has a disproportionate advantage over other countries in producing a particular good at a much lower cost. Thus this particular nation can focus its resources in production of this particular good which gives it an absolute advantage for achieving maximum optimization and efficiency.
A country’s capability of specializing in producing a particular good is also dependent upon its Comparative advantage. While, on one hand Absolute advantage is the advanced capability of a nation to produce a particular good, comparative advantage refers to the opportunity cost of producing any good. Simply put, if the opportunity cost of producing one good is lesser in one country than another, than the country is said to have comparative advantage over the other. Opportunity cost is factor that leads a country to specialize in producing a particular good. For Example If there are two countries X & Z and the opportunity cost of producing a particular good in country X is 5 units of food and the opportunity cost of producing that particular good in country Z is 2 units of food, the opportunity cost of producing the good in country Z is lesser than country X. Thus, country Z in this example would be said to have the comparative advantage in producing that particular good.
There could exist a situation where the country X may have an absolute advantage in producing food, thus the country X can focus its resources in producing food and importing that particular good from country Z. This would enable the availability of the particular good at a low price since the opportunity cost of producing the good in country Z is lesser.
Thus these two countries would trade and each would gain.
To review the two terms compared,
Absolute advantage exists when a particular country can produce largest number of goods much more efficiently, using the same resources while Comparative advantage exists when a country has a lower opportunity cost of producing a particular good. Comparative advantage also refers to the ability of a country to produce a good better than others due to its specialization.
Comparative advantage is a win-win situation for the countries involved, each getting the product at a lower rate. Absolute advantage is a slightly skewed situation where one country has disproportionate advantage over the other countries.
Absolute advantage takes into account cost factors while comparative advantage takes into account opportunity cost.