The Theory Behind Absolute Advantage

The growth rate of the U.S GDP stands at 3.23 percent from 1947 up to 2016(Cuñat & Melitz, 2012). In the international trade, the absolute advantage indicates the ability of the economy to conduct tasks appropriately. The comparative advantage identifies the economy, which produces the goods with the lowest opportunity cost.

Absolute advantage is the ability to produce more than one product efficiently and at the lowest cost. Comparative advantage is the ability to specialize in producing one product at the lowest cost. Comparative advantage affects trade the most because with specializing in producing one product the companies must trade to receive other products. Comparative advantage also considers the opportunity of cost to produce one product verse the other.

Pretend for a moment that you are much better than your best friend at chopping pineapples and at waxing surfboards for tourists. Economically speaking, you are said to have the absolute advantage over your friend because you are better at both tasks.  An easy way to identify absolute advantage is to see who can produce the most of a good or who can do it in the fastest time as we see in this example.  Absolute advantage is when some individual, group, or country has the ability to produce a product more efficiently than another individual, group, or country.  

Now, say that you and your best friend opened a fruit and surf stand on the local beach. There are two tasks that need to be completed: waxing surfboards for the surfers who stop by and chopping pineapples for a refreshing snack for people at the beach. While you might be better at both jobs, you can still get the work done quicker if you each take on one of the tasks. The question is: who waxes the boards and who chops up the pineapples? Let’s say:

Absolute advantage is when a country produces more of a certain good and less of another good using the same amount of resources. Countries that practice this method are able to take advantage of an economic opportunity that allows them to work more efficiently. For example if two countries agree to import/export for maximum output it creates an absolute advantage to both parties. The U.S can produce more wheat than China, and China can turn around and produce more electronics than the U.S. This occurs because electronic products are cheaper and are now manufactured in China. The factories are bigger and work faster in terms of demand than those in the U.S. There are countries with environmental limitations and are not able to produce crops,

The theory of absolute cost advantage explains how trade helps increase the total output in the two countries. But it fails to explain whether trade will exist if any of the two countries produces both of goods at lower cost. In fact, this was the deficiency of this theory, which led David Ricardo to formulate the theory of comparative cost advantage (Haberler, 1950).

Comparative and Absolute advantages: Comparative advantage is the ability to make or produce something at a lower opportunity cost. Opportunity cost is something that we do every single day in the way we live our lives. This is giving up something for something else. If you wanted to buy some new sports gear for your man cave it may cost $100, but if you only make $50 a week. You unfortunately would have to give up spending any of your money for two whole weeks to buy some of this new swag.

However, it was apparent to economists that nations with similar resource endowments exchanged similar products with each other. Economists felt that trade explained solely by comparative advantage was an incomplete analysis of international trade. Furthermore, since the classical trade theory was unable to explain intraindustry trade, economists decided to expand on the classical trade theory by creating a new theory of trade (Carbaugh, 2011). The new theory states that economies of scale provide incentive for a country to specialize in a particular product (Carbaugh, 2011). Furthermore, based on economies of scale, nations with similar factor endowments will trade with each other as sometimes it is beneficial (Carbaugh, 2011). Arguments stemming from this new trade theory puts the economic case for free trade in doubt.

Free trade is an important economic policy that has been brought to the forefront of debate. Arguments have varied from the potential harm it brings to specific groups of people, to the idea that free trade is extremely beneficial in the increasing of competition and improving the nationwide economy. Free trade is a policy that practices removing restrictions such as tariffs, taxes, and bans, allowing for free participation among all kinds of economies and producers. In other words, free trade is a way to “break down” economic barriers. Comparative advantage is a term often used to support the policy of free trade. The theory of comparative advantage displays that if trading partners produce where there is the lowest opportunity cost, then

Which is cost difference determines the patterns of international trade. Absolute advantage is trade benefits when each country is at least cost producer of one of the goods being traded. In the 1800s, David Ricardo developed the theory of comparative advantage to measure gains from trades. This theory is based on comparative advantage and it states each nation should specialize in production of those goods for which its relatively more efficient with a lower opportunity cost.

A Splendid Exchange is an inside look at how trade has had an impact on human development. The book answers the questions of how trade developed, how it expanded, and how trade is an essential economic force. The author, William J. Bernstein, explains how trade almost always benefits the nations that engage in it, but only when averaged over the entire national economy. The push for to trade is been a part of our history, and new patterns of trade always produce advantages and disadvantages. Bernstein explains that from a historical standpoint, which has been going on for

Absolute advantage in production entails the ability of an individual, a company or a country to produce a product at a lower per unit cost as compared to other entities. Therefore, an entity with absolute advantage may produce goods using smaller quantities of the inputs. From the above countries producing X and Y, country B has

The classical model also known as the Ricardian model argued that countries trade because of differences in their technology however, the Heckscher-Ohlin (HO) is a factor-proportions theory of comparative advantage idea which argues that the idea of comparative advantage works under the influence of relative factor abundance and relative factor insensitivity (Suranovic, 2006).

Economists use the term absolute advantage when comparing the productivity of one person, firm or nation with that of another. The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good (Gans, King, & Mankiw, 1999).

Comparative advantage is a principle developed by David Ricardo in the early 19th century to explain the benefits of mutual trade (Carbaugh, 2008). Many underlying assumptions of comparative advantage depend on states of economic equilibrium and an absence of economy of scale. In reality, economies are dynamic and subject to innovation and interference; which has led to revised assumptions of return and competition (Krugman, 1987). These factors have created questions of free trade and governmental participation in an economy by the development of strategic trade policies. These new concepts do not replace the theory of comparative advantage; however, they further explain how trade can benefit a country's economy (Krugman, 1987).

The importance of international trade in the world has been widely studied and also examines the role of international trade in the various issues. Mainly my paper focused on the relationship between Economic Development and international trade, disadvantages of international trade also discussed. International trade is an activity of strategies importance in the development process of a developing economy. International specialization means that different countries of the world specialize in producing different goods. Trade policy formulation and implementation covering issues such as tariffs, incentives, quotas, taxes, customs and administration, subsidies, rules of origin, public procurement regimes, aid and investment, export promotion, trade facilitation and diversification. The role of foreign trade in achieving a quicker pace of economic development is thus well recognized. Hence, planning of foreign trade cannot be divorced from the strategy of overall development. The disadvantage of international trade is that the welfare of the people in nations that produce goods and services is sometimes ignored for the sake of profits. In conclusion it can be said that, international trade leads to economic growth provided the policy measures and economic infrastructure are accommodative enough to cope with the changes in social and financial scenario that result from it.