Absolute Advantage vs. Comparative Advantage in Trade: The Ricardian Model

¶ … country has absolute advantage over other countries in producing a certain line of goods if it can produce those goods at a higher productivity level or a lower cost (Suranovic, 2015; Kilic, 2002). In contrast, a country has comparative advantage if it can produce the same goods at a lower opportunity cost than other countries (Suranovic, Kilic). These are the brief meanings of these two terms.

A country possesses absolute advantage if it is more efficient than other countries in producing a good (Kilic, 2002). It possesses comparative advantage if it is relatively more efficient in producing that good than other countries. Efficiency is relatively measured in a country with comparative advantage. Some countries possess only comparative advantage because their resources and technological level are limited. Their trading advantage rests in opportunity cost in relation to the production of a certain good in comparison with another country. This leads countries to specialize in certain goods. This tendency to specialize is called international division of labor (Kilic).

The concept of absolute advantage in trade dates back to Adam Smith's work, "The Wealth of Nations (Kilic, 2002; Suranovic, 2015). A country with this advantage is the best at producing a particular good for the global market. But the truth is that no single country is best in all industries. Only a few countries can be said to possess or enjoy absolute advantage in trade. All countries can have comparative advantage. And everyone gains because it is comparative advantage, which really counts. Comparative advantage enables countries to export their own products despite the few, which possess absolute advantage. It builds on opportunity cost, which refers to the value of something given up in order to produce something else. This concept was introduced by David Ricardo, an economist in the 19th century. His concept, called the Ricardian Model, states that a country with absolute trade advantage in producing two goods should give up one of these and imports the other from another country because total output would still rise. Comparative advantage is thus the better option for nation states. These are states, which possess political legitimacy only from serving a sovereign nation (Kilic, Suranovic).

The Ricardian Model

This Model rests on these assumptios:

Countries engage in trade because of differences in their production technology. This model argues that the only difference between countries is the level of their production technologies (Suranovic, 2015). It assumes and argues that all countries are identical in all other inputs to trade. It thus reasons that countries trade because of differences in technology (Suranovic).

Trade is advantageous and beneficial for every citizen of any two trading countries. Ricardo supports this argument by the aggregate effect on welfare or by the changes in real wage of workers (Suranovic, 2015). Critics, however, dispute that this Model assumes that there is only one factor of production (Suranovic).