Question

What is the difference between absolute advantage and comparative advantage? If a country has an absolute advantage in producing a good, will it always be an exporter of that good? Briefly explain.

Short answer

Absolute advantage refers to the capability of producing more of a good or service with given resources, while comparative advantage refers to the ability to produce a good at a lower opportunity cost. A country will not always export a good just because it has absolute advantage in production because exports are based on comparative advantage. A country will only export goods that it can produce with the lowest opportunity cost.

Step-by-step solution

Definition of Absolute Advantage

Absolute advantage refers to the ability of a country to produce more of a particular good or service than other countries, given the same amount of resources. It's a measure of efficiency in production. For instance, if Country A can produce 5 tons of rice per hour, while Country B can only produce 3 tons of rice per hour, then Country A has an absolute advantage in producing rice.

Definition of Comparative Advantage

Comparative advantage points towards the ability of a country to produce a particular good or service at a lower opportunity cost than another country. Opportunity cost represents what needs to be given up in order to obtain something. For example, Country A may be able to produce both cars and bicycles more efficiently than Country B (absolute advantage in both), but the opportunity cost of producing cars is high for Country A because it could have produced a lot of bicycles instead. Therefore, it makes sense for A to specialize in bicycles (where it has a comparative advantage) and trade with B for cars.

Understanding the Link between Advantage and Export

If a country has an absolute advantage in the production of a particular good, it does not necessarily mean it will be an exporter of that good. The decision for a nation to export a good depends on comparative advantage rather than absolute advantage. Even if the country could produce the good more efficiently, if the opportunity cost of doing so is too high compared to other goods, they may choose to import that good and focus their resources on what they can produce with lower opportunity cost.