Absolute advantage is used to describe a situation in which a person, corporate entity or country can produce something at a price that is lower than others. Comparative advantage refers to a situation in which the same type of commodity can be produced with a lower opportunity cost than others. The difference between absolute advantage and comparative advantage lies in the difference between the advantages inherent in the two factors. Absolute advantage is focused on the advantage of cost, while comparative advantage is based on opportunity cost. Also, absolute advantage provides more benefits in trade than comparative advantage.
Comparative advantage occurs when a product can be produced more efficiently than other people, companies or countries producing the same good. The main benefit to comparative advantage in economics is the idea of trading a product one is more efficient at producing for a product he or she is less efficient at producing. This saves time, materials and labor, while also reducing the opportunity cost for producing the good. The reduction in opportunity cost shows a difference between absolute advantage and comparative advantage.
An example of this difference is if Country A can produce 10 pairs of shoes per hour and two sets of pencil per hour, while Country B can produce 100 sets of pencil per hour and one pair of shoes per hour, both countries have comparative advantage in different items. While Country A has comparative advantage in the production of shoes, Country B has comparative advantage in the production of pencils. Both countries can mutually benefit from trading in those two items in order to compensate for the items they are less efficient at producing.
Another example of the difference between absolute advantage and comparative advantage is the kind of benefits attached to an absolute advantage concerning the production of an item. Such a variance might be that Country A has an abundant resource of fresh oranges supplied by local farmers, while Country B does not have the kind of climate that permits the growth of oranges and must import its oranges from other countries. Country A has an absolute advantage over Country B in the production of orange juice simply because it can obtain oranges at a much cheaper rate and without expending too much labor, including transportation logistics. The absolute advantage Country A has is due to its close proximity to the source of the raw material, unlike Country B, which has to put in extra effort just to get the raw material needed to produce the same end product. This makes it more prudent for Country B to import the finished product from Country A.
