Absolute vs Relative Advantage

Topics: International trade, Comparative advantage, Trade Pages: 2 (535 words) Published: November 5, 2012
Trade flows concerning either merchandises or services have been increasing a lot during these last 50 years. All of the countries are concerned about it, and both sides can draw huge benefits from the trade system. Hence, even if a developed country can produce all kinds of goods for a cheap price, this country may still benefit from the trade with less developed countries where these goods are produced for a higher price. This is striking but this comes out from the theory of “relative advantage”.

The absolute advantage is the fact that one country (named A) is more efficient and productive than another country (named B) in the production of all goods. It is said that A has an absolute advantage on B. When these two countries have different relative efficiencies, they can make profit from trading with each other. For instance, if B can produce a type of good X with a lower opportunity cost than A, trading can bring gain to both countries. B has to increase its production of X and will be able to trade it with A for other commodities.

Most of the time, there is always a comparative advantage between countries, even between the most developed ones. The history of a country, its traditions, its evolution, its climate all have a strong impact on the production’s price of goods and services. Each country in the world, whether it is poor or rich, has its own specific field(s) in which it has a comparative advantage on the others. To my mind, comparative advantage is still the most important element of our trading system. To illustrate this idea, we can mention the trade between Germany and France. Germany has a comparative advantage in producing cars, especially luxury cars : one third of registered cars in Europe in 2011 are made in Germany which is huge. France has an important comparative advantage in agriculture, mostly because of the common agricultural policy which gives a lot of money to French farmers. As a matter of fact, Germany exports cars in France...
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