The Principle of Absolute Advantage
A country has an absolute advantage over it trading partners if it is able to produce more of a good or service with
the same amount of resources or the same amount of a good or service with fewer resources. In the case of
Zambia, the country has an absolute advantage over many countries in the production of copper. This occurs
because of the existence of reserves of copper ore or bauxite. We can see that in terms of the production of
goods, there are obvious gains from specialisation and trade, if Zambia produce s copper and exports it to those
countries that specialise in the production of other goods or services.
The Principle of Comparative Advantage
David Ricardo (1772-1823), in his theory of comparative costs suggested that countries will specialise and trade in
goods and services in which they have a comparative advantage. It is easy to see that if countries have an
absolute advantage there are advantages to trade. However, what happens if one country has an absolute
advantage over its trading partners in the production of a number of goods. Specialisation and trade can still result
in there being welfare gains made from trade.
A country has a comparative advantage in the production of a good or service that it produces at a lower
opportunity cost than its trading partners. Some countries have an absolute advantage in the production of many
goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing
anything, relative to their trading partners. The theory of comparative costs argues that, put simply, it is better for
a country that is inefficient at producing a good or service to specialise in the production of that good it is least
inefficient at, compared with producing other goods.
The Production Possibility Curve can be used to illustrate the principles of absolute and comparative advantage.
Country A has an absolute advantage in the production of
both maize and wheat. At all points its production possibility
curve lies to the right of that of Country B. Country B has an
absolute disadvantage. Due to abundance of raw materials or
more productively efficient production techniques, Country A
is able to produce more wheat and more maize that Country
B. Perhaps common sense tells us that Country A should
produce both goods and export surpluses and Country B
neither. However, when comparative advantage is considered
a different story emerges.
Consider the opportunity cost of Country A producing one
more unit of maize. Half a unit of wheat has been foregone.
When country B produces one more unit of maize two units
of wheat are foregone. Economics is concerned with the
allocation of scarce resources. Fewer resources are foregone
if Country A concentrates its resources in the production of
maize.
Now consider the opportunity cost of Country B producing one more unit of wheat. Two unit s of maize have been
foregone. When Country B produces one more unit of wheat only half a unit of maize is foregone. Fewer resources
are foregone if Country B specialises in the production of wheat.
In the above case Country A should produce maize and Country B wheat. The surpluses produce should then be
traded.