What are the differences between comparative advantage vs absolute advantage.
Both comparative advantage and absolute advantage influences how various economies utilize their scarce resources so as to maximize production of certain goods.
Diverse countries have different capabilities of producing certain products. Each and every country has an absolute advantage over another country. A country should identify a product which it can produce in large quantities at a relatively lower cost.
For example, Kenya produces tea in large quantities and at a lower price compared to Uganda. Uganda on the other hand produces maize in large quantities at a lower cost compared to Kenya. So Kenya should concentrate more on producing tea and then export to Uganda and other countries and then use that revenue to import maize from Uganda.
In this scenario, each of the two countries have an absolute advantage over each other. A country should produce those products that make it have an absolute advantage over other countries instead of exporting everything.
A country is said to have specialized in production of a certain product if it has committed all its resources in that area. Specialization is the process of improving production skills which have been gained from producing a certain product over and over again.
For example, in Kenya, milk is the product which is produced in large quantities by the majority of the farmers. The country ensures that the farmers are well trained, farmers can purchase animal feeds at a lower price and the market is readily available.
A country’s choice specialization depends on its comparative advantage. Opportunity Cost is the determinant of comparative advantage. Opportunity costs are the benefit we forgo when we choose to produce a specific product instead of another.
A nation chooses goods to specialize based on its comparative advantage. While absolute advantage is when a nation can produce goods of superior quality faster than other countries, comparative advantage is based on opportunity cost. Opportunity cost is referred to as the benefits lost when one alternative is chosen over another. For example, Kenya produces both tea and milk. If on a monthly basis the earnings of mil are 10 billion and those of tea are 7 billion, the opportunity cost of milk is lower than that of tea. Kenya should commit tits resources in producing milk.
Adam Smith was the first expert to recommend countries specialize in productions of products they can produce efficiently and only import products they can`t efficiently produce. He then related specialization to absolute advantage. For example, if Kenya can produce more milk per hour compared to Uganda and Uganda on the other hand can produce more animal feeds per hour compared to Kenya, Kenya should produce milk and import animal feeds from Uganda.
Comparative advantage was introduced by an economist named David Ricardo. He recommended countries to trade with each other even if they have an absolute advantage on their every product. He advised countries to specialize in products that they can produce at a much lower opportunity cost.
For example, Japan produces 5000 cars and 3000mobile phones per hour whereas China produces 2000 mobile phones and 500 cars per hour. Japan has an absolute advantage in producing both products. Japan will have a comparative advantage if it produces only car imports to China and then exports mobile phones from china.
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