Comparative advantage and Absolute advantage in global market
Comparative advantage and Absolute advantage in global market
Comparative advantage in the global market is an ability of any given economic firm to manufacture products and services at a lower cost than other economic firms. Giving limited resources after that the nations has to choose the specialize in the production of a particular good by its comparative advantage. On the other hand, absolute advantage is considered as the better production capabilities of a country as compare to another and comparative advantage theory is based on the subject of opportunity cost. The benefits which can be obtained by selecting the alternative is known as the opportunity cost of a given product. When the opportunity cost of selecting a specific good is lower for one country than for others, so now that country is supposed to have a comparative advantage.
Difference between comparative and absolute advantage in global market
Absolute advantage refers to the ability to generate more of a specified product using a minimum of an available resource compared to a rival nation. Absolute advantage relates the productivity of several producers or economies. The manufacturer who requires a smaller amount of inputs to produce a product is supposed to have an absolute advantage in manufacturing that product. For example, the amount of output of Country X and Country Y can produce in a given period of time to make food or clothing. Country X makes 5 units of food while Country B makes 2 unit of food, and Country X makes 4 units of clothing while Country Y makes 2 unit of clothing. So Country X produces more output than Country Y. In other words, Country X has an absolute advantage in making both food and clothing.
Comparative advantage refers to the capability of a firm or country to produce a certain product or service at a lesser marginal cost above another. When one nation has an absolute advantage in manufacturing all products, several nations must still have diverse comparative advantages. When one nation has a comparative advantage above another, both entities has an advantage from trading since each entity would get a product at a price which is lower than its own cost of manufacturing.
Comparative advantage pushes nations to focus on the production of the products or services for which they have the lowest cost, which leads to increase the productivity. For example, Country X and Country Y has the opportunity cost of producing 2 unit of clothing and 4 units of food in Country X, but a unit of food in Country Y. As the opportunity cost of producing clothing is lesser in Country Y than in Country X, Country Y has a comparative advantage in clothing. Country X has an absolute advantage in both clothes and food and, it would focus on food whereas Country Y concentrates in clothing. The countries will trade, and each will gain.
