Learn The Economy Easily! Understand The Main Difference Between Mutlak's Advantages And Comparatifs

Illustration of the main difference between absolute and comparative (freepic) advantages

YOGYAKARTA - In economic science, understanding the main difference between absolute and comparative advantages is very important to explain how countries or individuals can benefit each other through trade.

Through the understanding of these two concepts, you will know why a country can still profit even if it is not the best producer in the world.

This article will discuss the understanding, examples, and ways of distinguishing the two easily to better understand modern economic theories.

Absolute advantage and comparative advantage are two important concepts in the economy that help countries and companies determine the best way to utilize resources to produce goods that will be traded internationally.

Reporting from the Investopedia page, an absolute advantage occurs when a country or company is able to produce products with higher quality, production time is faster, and costs are lower than its competitors.

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Meanwhile, a comparative advantage emphasizes the ability of a party to produce goods with better efficiency or relatively cheaper costs, even if they do not have absolute advantages. In simple terms, both concepts can be understood as:

Both of these concepts are very useful for helping countries or companies determine which products should be produced on their own and which are better imported. More fully, here are the discussions:

The absolute advantage is based on the ability to produce goods more efficiently than competitors. This can be achieved through lower labor costs, availability of natural resources, or large capital.

For example, Italy and Japan both produce cars. If Italy is able to make sports cars with higher quality and greater profit, then Italy has an absolute advantage in the sports car market. On the other hand, Japan may focus on electric cars or SUVs to take advantage of advantages in other sectors.

In other words, an absolute advantage is achieved by creating goods at an absolute cost lower per unit, using a more efficient process or input.

The comparative advantage is more about the relative benefits of the various production options available. The state or company will choose to produce goods at the lowest opportunity cost.

For example, China can produce 10 million smartphones or 10 million laptops. If the profit from laptops is higher, then the cost of the opportunity to make smartphones is the difference in the loss of not producing laptops.

If one laptop produces $100 and one smartphone $50, then the cost of smartphone opportunities is $50 per unit or a total of $500 million. Therefore, China will choose to produce laptops because they are more profitable.

The cost of chances is the benefits that are sacrificed by choosing one option over other available options.

Scottish economist Adam Smith is the first to introduce the concept of absolute advantage in his book The Wealth of Nations. He argues that the state should focus on the most efficient productionable goods and exchange them for items that cannot be produced efficiently.

For example, the UK can produce textiles faster, while Spain is superior in wine production. So, the UK should export textiles and import wine, while Spain does the opposite.

Then, British economist David Ricardo developed a comparative advantage theory. According to him, even though one country has an absolute advantage in all products, there will still be benefits from trade if the country focuses on products with the best relative advantage.

Saudi Arabia has an absolute advantage in the oil industry because of its enormous oil reserves. However, due to 95% of its area in the form of deserts, this country is not superior in the agricultural sector and must import about 80% of its food needs.

Now, from the exports of oil, Saudi Arabia has benefited from financing these imports, creating mutually beneficial trade relations.

Thus it can be concluded, if Adam Smith explains that the state will prosper if it focuses on producing the most efficient goods to export, and importing inefficient goods is self-produced. That is the basis of the concept of absolute advantage.

While the comparative advantage emphasizes production selection based on the largest potential gain after accounting for the cost of opportunities. By understanding these two concepts, countries and companies can make smarter and more efficient economic decisions in international trade.

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