The theory of comparative advantage is perhaps one of the most important concepts in international trade theory.
A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity. Absolute advantage compares industry productivities across countries. In the case of Zambia, for instance, 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 produces copper and exports it to those countries that specialise in the production of other goods or services.
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. The opportunity cost of a good is the quantity of other goods sacrificed to make another unit of that good. 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...
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