Absolute Advantage and Comparative Advantage
According to the classic model of international trade introduced by David Ricardo (19th-century English economist) to explain the pattern and the gains from trade in terms of comparative advantage, it assumes a perfect competition and a single factor of production, labor, with constant requirements of labor per unit of output that differ across countries. The basis for trade in the Ricardian model is the differences in technology between countries. As a result, there are two different ways to describe technology differences: the first method, called absolute advantage, is the way most people understand technology differences; and the second method, called comparative advantage, is a much more difficult concept. Absolute advantage is the simplest measure of economic performance. It is the ability to produce a good at a lower cost, in terms of real resources than another country. Absolute Advantage is neither necessary nor sufficient for a country to export a good. In other words, a country has an absolute advantage economically over another, in a particular good, when it can produce that good more cheaply or it can produce more of the good than another country can, with the same amount of resources. In fact, absolute advantage appears when multiple products are being considering. For example, if the country “A” has an economic advantage against the country “B” at producing the product “X”, and the country “A” has an economic advantage against the country “B” at producing the product “Y”, so “A” has an absolute advantage against “B” with respect to products X and Y. In fact, a country has an absolute advantage over it trading partners if it is able to produce more of a good with the same amount of resources or the same amount of a good with fewer resources. For example, Zambia has an absolute advantage over many countries in the production of copper because of the existence of reserves of copper ore or bauxite. So...
Bibliography: Keegan, Warren J., and Green, Mark S. Global Marketing. Second Edition. Upper Saddle River, New Jersey: Prentice-Hall, 1997.
Buzzell, Robert D., Quelch, John A., and Bartlett, Christopher A. Global Marketing Management: Cases and Readings. 3rd edition. Netcong, NJ: Addison Wesley Longman, 1995
Suranovic, Steven M. “Definitions: Absolute and Comparative Advantage”. International Trade Theory and Policy Lecture Notes: 7/18/06
Please join StudyMode to read the full document