Comparing Productions Through Absolute Advantage and Comparative Advantage by Omkar Abhyankar

 Given any particular producer, in the last article we briefly discussed how to calculate the opportunity cost for producing certain goods over others. Now, we will introduce the concepts of Absolute Advantage and Comparative Advantage to compare the production of two producers.

Absolute Advantage: One way to compare the production of two producers is by directly inspecting how much of any particular good can be produced when both producers allocate all their resources towards it. For an example, let’s focus on the production of glasses by The United States and China in the table below. 

Based on the table it is evident that if both the United States and China allocate all of their resources towards the production of glasses, then the United States is able to produce a maximum of 30 glasses while China is only able to produce a maximum of 20 glasses. Therefore, we say that The United States has an absolute advantage over China in the production of glasses, since it is able to produce more. In terms of chairs however, China can produce a maximum of 100 chairs while the United States can produce only a maximum of 90. So from this standpoint, China has an absolute advantage over the United States. 

As we saw in this example a Producer A  has an absolute advantage over another Producer B in terms of a particular good if Producer A has the ability to produce more of that good than Producer B.

Comparative Advantage: When two firms’ productions are being compared, the firm which can produce a good at a lower opportunity cost than the other firm is said to have a comparative advantage in the production of that good over the other firm.

Now using the same scenario as above, let’s find which country has a comparative advantage in the production of each good. First, let's consider the production of glasses. To find which country holds comparative advantage, we must compare the opportunity costs per unit of glasses for each country.

Based on our calculations, the opportunity cost in the United States for producing 1 pair of glasses is 3 chairs while the opportunity cost in China for producing 1 pair of glasses is 5 chairs. Since the United States has a lower opportunity cost of producing glasses, we say that the United States has comparative advantage over China in this particular production. Now following a similar procedure, we can find which country has comparative advantage in the production of chairs. 

Based on these calculations, we are given the opportunity costs for both countries producing 1 chair in terms of glasses. The opportunity cost for producing a chair in China is less than the opportunity cost of producing a chair in the United States and therefore, China actually has comparative advantage over the United States in this production. So we can conclude that China has comparative advantage in the production of chairs while the United States has a comparative advantage in producing glasses. Since comparative advantage is essentially measuring the least costly production in terms of opportunity cost, it is useful because it tells us which economy is more efficient in producing a good. Using this knowledge, we can say that China produces chairs more efficiently while the United States produces glasses more efficiently. 

For each economy to understand which goods to trade and how much, analyzing comparative advantages across producers is crucial. In the next article we will dive deeper into how the concept of comparative advantage is precisely used to perform fair and beneficial trades.