Absolute advantage is a country’s ability to produce a series of products at the lowest cost as possible. Comparative advantage is the production of a good at a lower cost compared to producing another product that uses the same resources but at a higher cost (Spaulding, 2018). Both deal with the production of goods for trade. The only difference between the two is that comparative advantage encourages specialization, where a country chooses to focus all its resources on producing a particular product.
The two entities do have a relation to opportunity cost. The whole theory of a prosperous economy relies on scarcity and profit. A county has to be capable of producing a particular product at a low price and be able to attain profits after trading it. Opportunity costs come in where a country gives up the production of multiple products and chooses to perform comparative advantage, specializing in the production of one good. The distinction makes opportunity cost the difference in value between what a country can produce to what can be created using the same resources.
An illustration of the fact is the comparative theory of David Ricardo created in the year 1817. The theory advocates for comparative advantage, which results in more business and profits. The example uses two countries, England and Portugal, which produce the same products, wine and cloth (Spaulding, 2018) (See appendix 1). It is evident that Portugal has an absolute advantage, as it can produce both wine and cloth using fewer resources compared to England. None can attain profits, as neither country can trade with the other because each country does not need either cloth or wine. The concept of Ricardo introduces comparative advantage, where each country specializes in producing one product, saving on the resources it utilizes and trades with each other, making profits (HBS Working Knowledge, 2014).
On calculating the opportunity costs to produce each product, the results indicate that if both countries specialize, they can produce double the quantity of goods, making the nations more productive and enhance both economies at the same time. If England specializes in producing cloth, the total workforce used will be 200 workers, who will deliver double the quantity and save on resources equivalent to 20 men. If Portugal specializes in the production of wine, it will use a total workforce of 160 men, allowing it to save on resources equivalent to 10 men (Spaulding, 2018).
The application of the principles will allow both countries to get more output with many extra workers without inquiring additional costs (HBS Working Knowledge, 2014). The idea of Ricardo is a nation cannot experience an outcome that is worse from not partaking in trade. Despite the fact that some countries have more capabilities and resources, making them better on every aspect than other countries, they will still want to trade with each other, so why not formulate a trade relationship, which will make the trading process simpler. It is an insight that is over 200 years old and still effective as of today (Worstall, 2017).
An article written by Slaughter in the wall street journal shows that the US economy is facing a current issue where there is an increase in the unemployment rate. The issue resulted in a job crisis where there were over 20 million American citizens unemployed. The problem is still present despite the increase in private sector jobs over the last ten years. The fact made the economic challenge a government concern, where it had to focus on creating jobs for its citizens (Slaughter, 2011).
The practical solution to the issue is to encourage entrepreneurship and the development of small businesses. The approach will ensure the US economy is competitive at a global level. The theory used as a basis for the technique is the principle of comparative advantage. The first solution suggested to the President was to increase manufacturing businesses in the country. It was not economically sound, as it would result in the country having an absolute advantage, thus will not benefit from trade. However, the deployment of comparative advantage will result in the creation of a small business that will have the ability to grow, as they will have cost-effective approaches to manufacturing their products by using foreign connections. The method will result in many economic benefits and lead to globalization.
Also, it will increase importation of the other products the country may need. Some financial analysts see the whole idea of importation a disadvantage, advocating that the better option is to make the products domestically and save on importation money while creating jobs, which is a good idea but not a practical approach. The aspect of importation is not a failure to the economy because it can raise the standards of American citizens. An illustration of the fact is using an example of a retail business. The US economy has the workforce to manufacture the cloth, design and sell the finished products, but the disadvantage is that the business will not have any foreign relations, which equals to no foreign market to export its products to, making the business stagnant.
If the US implements the similar principle, it will save on opportunity costs. The retail business can outsource its cloth manufacturing operations to a country such as China, enabling it to save money and double its cloth production. The sharing of duties will give the company the opportunity to concentrate on design and selling the commodity, allowing it to have time to create foreign relations thus having an international market for business. Overall, the country will import finished cloths materials and export the finished products to China and other countries, making the US competitive on a global level. Over time, the small business will grow to become a corporation thus increasing employment opportunities in the market.
The practice of the comparative advantage in the US developed foreign affiliation that generated over 6 trillion in sales within one year, which was in 2008. Besides, the foreign reach of domestic companies allowed them to be multinationals, having branches abroad. The result was over 5 million Americans working abroad and earning a third of all Americans in the country (Slaughter, 2011).
The concept of opportunity costs is what differentiates absolute advantage and comparative advantage. The former makes America independent on all aspects, which will not result in economic development but the latter will shape the economy, allowing companies to have the incentive and opportunity to hire and grow. The country has to choose to immediately address the crisis by practicing absolute advantage or deploy comparative advantage, which will solve the problem in the future. The best decision on the matter has to look into the overall economic development, and the solution that best achieves the goal is a comparative principle (Worstall, 2017).
- Spaulding, W. (2018). Absolute Advantage, Comparative Advantage and Opportunity Cost.
- Slaughter, M. (2011). Comparative Advantage and American Jobs. The Wall Street Journal.
- HBS Working Knowledge (2014). An Economic Principle for Us All: Comparative Advantage. Forbes.
- Worstall, T. (2017). Pass The Port – David Ricardo’s Comparative Advantage Is 200 Years Old Today. Forbes.