Distinguish Between Absolute and Comparative Advantage Trade Theories

Question:-

Distinguish between absolute advantage and comparative advantage trade theories and give examples

Answer:-

Absolute advantage trade theory refers to the efficiency in production due to the beneficial forces of resources and climate. This could be due to natural causes such as favorable climate and advantageous geographical location. It also includes acquired or man-made advantages which have been engineered such as technologies which produce the necessary valuables. Absolute natural advantage example could be the advantage of Saudi Arabia for its large natural oil reserves and for technological absolute advantage the example of Japan can be taken due to its flexible and innovative technology solutions (Rehim, 2002).

Comparative advantage trade theory indicates a business or nation’s ability to produce products at low marginal costs and opportunity costs. Comparative advantage guides international trade. The opportunity cost of production is the main determinant of the advantage. It refers to the efficiency in production practices (Rehim, 2002). The example between UK and US can be taken. If US produces 100 bags of corn it would have to forego at least 20 bags of cotton and if UK focuses on the production of cotton then for every 20 bags it would earn the opportunity of producing 50 corn bags. Therefore, UK is in an advantageous position as compared to the US.