Explain and provide examples of the difference between comparative and absolute advantage in global markets.
In the global market, different countries have different production cost, may be for the same product, due to the difference in the cost of the raw material and/or other necessary resources. Therefore a global business has to adopt to either absolute advantage or a comparative advantage to produce different products.
A company that requires a smaller input quantity to produce a product has an absolute advantage while a company that has to produce a product or service at a lower opportunity cost is said to have a comparative advantage.
Japan and USA are both car manufacturer. Japan would have an absolute advantage over USA if it can produce better cars at a greater speed than USA. Absolute advantage provides an edge to countries or companies in the production of the products they chose to manufacture.
Different countries may want to be successful in the production and sales of many products, but this may not be the case. For example, one country may have a superiority in producing heavy trucks while other may have a superiority in producing cars. Each of these countries have a comparative advantage in their respective product. Both of them can take advantage of each other production.
The same way, USA has a comparative advantage innovation of technologies. Different other countries are taking advantage of these innovation by getting the innovative product on cheaper rates than if they had to innovate these products and then produce them.