Comparative advantage requires a more holistic view of production. In this case, the perspective lies in the fact that a country or company has the resources to produce a variety of goods and services, rather than focusing on a single product. Other examples include Colombia and its climate – ideal for growing coffee – and Zambia, which has some of the richest copper mines in the world. It would be extremely expensive and probably unproductive for Saudi Arabia to try to grow coffee and Colombia to drill for oil. Suppose there are two countries I and II and two products A and B. For example, the country can produce one unit of commodity (A) of 10 and one unit of commodity (B) of 20 units of labor, and in country II, the production of one unit of (A) costs 20 and a unit of (15) costs 10 units of labor. Now, Land I has an absolute cost advantage in tin production (A) and will be limited to the production of (A) and Land II to the production of (B). Exactly the same thing would happen if I and II were two regions of one country. We are talking about absolute cost differences, because each country can produce a product at an absolutely lower cost than the other. In such a situation, therefore, a division of labor between them must lead to an increase in total production.
One of the advantages of absolute advantage theory is its simplicity: it provides an elegant explanation of the benefits of trade and shows how countries can benefit from it by focusing on their absolute advantages. According to Figure 1, the United Kingdom commits to producing 80 hours of work to produce one unit of fabric, which is less than the hours of work required by Portugal to produce one unit of fabric. The UK is able to produce one unit of fabric with fewer working hours, so the UK has an absolute advantage in fabric manufacturing. In contrast, Portugal commits to 90 hours for the production of one unit of wine, which is less than the working hours required by the United Kingdom to produce one unit of wine. Therefore, Portugal has an absolute advantage in wine production. There are many examples of absolute benefits, especially in the real world. For example, Saudi Arabia`s oil reserves are abundant, giving it an absolute advantage. This is one of the reasons why it exports the goods to other countries in the world. As explained earlier, the theory also assumes that absolute advantages are static – a country cannot change its absolute advantages, and they do not become more efficient with size. Real experience has shown that this is not true: many countries have managed to gain an absolute advantage by investing in strategic industries.
The concept of absolute advantage was developed by 18th century economist Adam Smith in his book The Wealth of Nations to show how countries can benefit from trade by specializing in producing and exporting goods that they can produce more efficiently than other countries. Countries with an absolute advantage may decide to specialize in the production and sale of a particular good or service and use the funds generated to purchase goods and services from other countries. In fact, the theory has been used to justify exploitative economic policies in the postcolonial era. Arguing that all countries should focus on their advantages, large organizations such as the World Bank and IMF have often pressured developing countries to focus on agricultural exports rather than industrialization. As a result, many of these countries remain at a low level of economic development. Absolute advantage leads to obvious advantages of specialization and trade only if each producer has an absolute advantage in the production of a good. If a producer does not have an absolute advantage, then Adam Smith`s argument would not necessarily be true. The explanatory power of the theory of comparative advantage is lacking. Harry can make five scarves in 20 hours and Sally can make four scarves in 20 hours. In this scenario, Harry has an absolute advantage as he can make one more scarf than Sally with the same amount of time. In other words; He does a scarf every four hours and Sally one every five hours.
Sally is 80% as effective as Harry when it comes to making scarves. Adam Smith is generally ignored as a trade theorist in international economics textbooks because he generally believes that he confirmed the rule of absolute benefits only to explain the structure of foreign trade. The idea of absolute advantage was developed by Scottish economist Adam Smith, who explained how countries can benefit by specialising only in the goods and services they can produce efficiently. Smith suggested that countries could open trade with others to products they cannot produce efficiently themselves. The concept is often contrasted with the comparative advantage studied by economists such as David Ricardo, according to Smith. He suggested that countries produce goods and services not necessarily in greater volume or better quality, but at a lower opportunity cost. Although these ideas have evolved since their development, the basic foundation still prevails today in production and international trade. An absolute benefit can be achieved by creating the good or service at a lower absolute cost per unit with fewer inputs or by a more efficient process. If each country specialized in its absolute advantage, Atlantica could make 12 cups of butter and no bacon in a year, while Pacifica makes no butter and 12 plates of bacon. Through specialization, the two countries share the tasks of their work.
This idea contrasts with the concept of mercantilism, which dominated economic discussion and practice at the time. Under mercantilism, nations severely restrict trade and work to produce everything they need within their borders. Economists usually use absolute advantage to compare countries, but they can use it to compare two regions. For example, Nebraska might have an absolute advantage in corn production over Massachusetts, even though both are part of the same country. Since Smith focused solely on comparing labor productivity to determine absolute advantage, he did not develop the concept of comparative advantage. [2] While there are potential gains to trade with an absolute advantage, the gains may not be mutually beneficial.
