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Comparative Advantage and Absolute Advantage
Comparative advantage focuses on the range of possible production. Comparative advantage is a concept of economics that focuses on the range of products possible for a particular product. This concept helps people organize their labor in ways that give them a more significant advantage over others.
For example, an engineer earns more than a math teacher. This is because the opportunities for value production are higher when the gaps between opportunity costs are more significant. In addition, a greater diversity of people increases the possibility for beneficial trade.
David Ricardo first introduced the theory of comparative advantage in 1817. The basic idea is that a country can specialize in a particular product and produce it for a lower opportunity cost than its trading partners. By utilizing this advantage, a country can increase its total output.
For example, if a country can produce a lot of refrigerators, it has an advantage over countries that produce only a tiny amount of each. Therefore, a country that produces shoes with a comparative advantage over countries with lower resources should specialize in that particular product.
Comparative advantage is a crucial concept in economics. It can be used to exploit the labor and natural resources of a country. This concept is the foundation of international trade theory.
Absolute Advantage Focuses on the Ability of an Entity to Produce a Product With Fewer Resources
Absolute advantage is a common economic concept focusing on how an entity can produce a product using fewer resources than its competitors.
The concept is also used to compare the productivity of two different producers, or economies, for that matter. An absolute advantage exists when an entity can produce a good with fewer inputs than its competitors, such as labor.
The concept of absolute advantage can be used to explain international trade and how people trade for less efficient goods. In oil, for example, an entity with an absolute advantage may be able to produce the same product with fewer resources. Using fewer resources, the entity can sell the same quantity at a lower price.
Another example of comparative advantage is fishing. A country with more bodies of water might have an advantage in this industry. A country with a larger body of water could build a commercial connection with another country.
According to this theory, an entity can reap benefits from trade when it specializes in one product over another. This means it can specialize in a specific product or service, leading to lower costs and greater profits for the country.
Adam Smith Developed the Concept of Absolute Cost Advantage
An absolute cost advantage is a country’s ability to produce more goods for a lower price than its competitors. It can also refer to a country’s ability to use its resources more efficiently.
Adam Smith developed the concept of absolute cost advantage as part of his book “An Inquiry into the Nature and Causes of the Wealth of Nations” in 1776.
His book argues that a country with an absolute cost advantage over another country will benefit from free trade.
Adam Smith developed the concept of absolute cost advantage to challenge those who opposed free trade. His theory argues that trade is an essential part of economic development, if one country were not allowed to trade with another, it would suffer.
Therefore, a country must diversify its products and services to achieve a competitive advantage. Free trade is also essential because it promotes the international division of labor.
Absolute cost advantage has many definitions in economics. It is best understood as the advantage of a nation in a specific industry over competitors. It is challenging to measure absolute advantage, especially for complicated products with many factor inputs.
Even when an economy does not have an absolute cost advantage, it should still be able to produce a good. An advantage is a difference in productivity and a lower opportunity cost compared to the competition.
Adam Smith also stressed that a country with a lower cost per unit of production has an absolute cost advantage over a country with lower costs. Those who produce goods at lower costs than their competitors should pursue this advantage. By doing so, they can maximize their wealth by exploiting their advantage in the best possible way.
Result of a Country’s Natural Endowment
A country’s natural endowment or resources may be the source of absolute advantage. For example, a country may have an abundance of petroleum, making it easy to extract crude oil.
The United States, by contrast, must spend a great deal of money and energy to produce the same amount of oil. These factors of comparative advantage are referred to as factor endowments, and the Heckscher-Ohlin theorem describes how a country’s factor endowments can contribute to its comparative advantage.
Product of Trade
Absolute advantage is the ability to produce something in great demand by others. This can be a natural endowment, such as abundant farmland. The United States, for example, has the richest farmland in the world. Countries like Colombia and Guatemala have climates ideal for growing coffee, while Chile has the world’s richest copper mines.
Adam Smith developed the concept of absolute advantage. He argued that countries could profit from specialization by producing certain products efficiently. Moreover, these countries could also open trade for these products. This was in contrast to the concept of comparative advantage, which suggests that countries can produce a good at a lower cost than other nations.
Geographic factors can explain the difference between comparative advantage and absolute advantage.
When a country has a geographical advantage, it can produce a higher quantity of a product at a lower cost than a rival.
A company with an absolute advantage can also have more natural resources at its disposal, which makes production processes more efficient.
Absolute advantage can be a product of different trades. It is not always easy to measure absolute advantage, especially in highly complicated products that require several factor inputs. However, this doesn’t mean that economies that don’t have an absolute advantage can’t produce a good.
Used to Justify Protectionism in the Postcolonial Era
The neoliberal consensus has produced a normative narrative that supports free trade deals. It begins with the premise that free trade benefits all parties and protectionism is usually misguided.
To defend free trade, the argument goes that countries should seek to maximize their relative advantage through trade, not by restricting or protecting their industries.
Colonial governments have been reluctant to accept markets in land rights in African colonies. Nevertheless, Phillips studied land rights in “peasant” and “settler” colonies.
Using these findings, dependency theory argues that colonialism in Africa failed to introduce a fully-fledged capitalist system, which creates pressures for competition and accumulation.
In the colonial era, land-extensive primary production was a significant advantage for a colonial state. This meant that a government would rarely attempt to change the status quo. Furthermore, the colonial markets for manufactured goods were disproportionately supplied by European merchants.
However, the early decolonization of African colonies resulted from the lack of revenue-generating potential. As a result, the French government and European firms had little interest in their former colonies.
Nevertheless, they were still deeply involved in the colonies, mainly through the franc zone. While British firms expressed concern about the future of their business in independent African governments, they failed to attract attention from decolonizing governments.
The development of manufacturing in postcolonial Africa was aided by tariff protection and import substitution. However, the high cost of black labor and low wages limited the scope of further expansion. Nevertheless, radical and liberal schools were right in that apartheid policies hindered growth.