Absolute Advantage versus Comparative Advantage
A country is said to enjoy an absolute advantage over another country in the production of a product if it uses fewer resources to produce that product than the other country does. For example, suppose that country A and country B produce wheat, but that A’s climate is more suited to wheat and its labor is more productive. Country A will therefore produce more wheat per acre than country B and use less labor in growing it and bringing it to market. Country A thus enjoys an absolute advantage over country B in the production of wheat.
A country enjoys a comparative advantage in the production of a good if that good can be produce at lower cost in terms of other goods. Suppose that countries C and D both produce wheat and corn and that C enjoys an absolute advantage in the production of both- that is, C’s climate is better than D’s, and fewer of C’s resources are needed to produce a given quantity of both wheat and corn. Now C and D must each choose between planting land with wheat or corn. To produce more wheat, either country must transfer land from corn production; to produce more corn, either country must transfer land from wheat production. Thus, the cost of wheat in each country can be measured in bushels of corn, and the cost of corn can be measured in bushes of wheat. Read more
International Trade Overview
We live in shrinking world. Wheat raised on the flatlands of western Kansas may be processed into bread in a Russian factory. The breakfast of many Americans might include bananas from Honduras, coffee from Brazil, or hot chocolate made from Nigerian cocoa beans. The volume of international trade, enhanced by improved transportation and communications, has grown rapidly in recent years. Approximately 21 percent of the world’s total output is now sold in a country other than that in which it was produced.
International buying and selling of goods and services take place between individuals (or business firms) that happen to be located in different countries. International trade, like other voluntary exchange, results because both the buyer and seller gain from it. If both parties did not expect to gain, there would be no trade.
All economies, regardless of their size, depend to some extent on other economies and are affected by events outside their borders.
When a country exports more than it imports, it runs a trade surplus. When a country imports more than it exports, it runs a trade deficit. Read more
