Absolute and Comparative Advantage

Absolute advantage is an international trade concept that influence why and how countries allocate limited resources towards the production of particular products. The absolute advantage is the superior production of a particular product by a nation against another. It means that a nation with an absolute advantage will produce a product at lower marginal costs. The calculation of absolute advantage involves using the ratios of the different products produced by the countries. The lower the ratio in producing one good to the other, the higher the absolute advantage the nation attains. From the table above, the USA has an absolute advantage in the production of lumber for it takes only one labor requirement per unit of output to produce lumber compared to two units in Canada. Canada has an absolute advantage in production of beef.

The comparative advantage is the ability of a nation to produce a particular product at a decreased opportunity cost compared to other economic actors. For one to calculate the comparative advantage of a nation, the production amount of the goods in country becomes divided against each other. As seen from the case above, in case the USA decides to produce lumber, its opportunity cost would be 4/1 indicating 4 units of labor for beef foregone. On the other hand, if Canada decides to produce lumber, the opportunity cost would be 1/2. It indicates that 0.5 units of labor requirement for beef foregone. From the case, it is an indication that Canada has lower opportunity cost for producing lumber giving it a comparative advantage in its production. For the USA it has a comparative advantage in producing beef. Since the USA and Canada cannot produce both items efficiently, Canada should specialize in lumber production and import beef form the USA while the USA should specialize in beef production and import lumber from Canada.