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Absolute and Comparative Advantage

The Principle of Absolute Advantage

A country has an absolute advantage over its trading partners if it is able to produce more of a good or service with the same amount of resources or the same amount of a good or service with fewer resources. In the case of Zambia, the country has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore. It follows that there are gains to be made from specialisation and trade, if Zambia produces copper and exports it to those countries that specialise in the production of other goods or services.

The Principle of Comparative Advantage

David Ricardo (1772-1823), in his theory of comparative costs suggested that countries will specialise and trade in goods and services in which they have a comparative advantage. It is easy to see that if countries have an absolute advantage there are advantages to trade. However, what happens if one country has an absolute advantage over its trading partners in the production of a number of goods. The theory of comparative advantage argues that it is best for a country to concentrate on producing only those goods an d services in which it is most efficient.

World merchandise exports by region, 2001

World export of commercial services by region, 2001

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