Absolute Advantage Economics Comparative vs.

¶ … Absolute Advantage

Economics

Comparative vs. Absolute Advantage

Trade exists because some areas, or groups, cannot produce, or cannot produce as efficiently, products that another are can. When an area cannot produce a certain product, then that area must trade something for the product they need. Usually they will trade something that they have, or can easily produce, that other areas cannot produce. This exchange is called trade. When a certain area has an advantage in producing things that another areas does not, this could be because either that area either has an absolute, or comparative advantage over the other area. While both describe an advantage of one area or group over another, they are both different in the nature of that advantage.

Absolute advantage is the easier of the two concepts to understand and involves the advantage that an area, or group has by its very nature. (Woo, 2005, p. 12) For example, Florida has an absolute advantage in the production of oranges than does Alaska. Florida's climate is better for growing oranges, and while sometimes the advantage will be the climate, it can also be such things as natural resources, the types of laws, worker restrictions, production regulations, or other factors that give one area an absolute advantage over another. If one allows workers to be exploited, then that area will naturally have lower payroll and production costs, and therefore have an absolute advantage.

On the other hand is comparative advantage in which the advantage that an area or group has in trade with another is only an advantage when those particular two things are compared. While this is usually defined as the advantage a country or business has in producing something at the cheapest price, it is really the cheapest price in comparison to the country or business that one is trading with. (Maneschi, 1999, p. 11) For example, Florida may have an absolute advantage when it comes to trading oranges with Alaska, but it does not have an absolute advantage when it comes to trading oranges with California. For Florida to have a comparative advantage with California in regards to the trade of oranges, Florida would have to be able to produce oranges cheaper than California. Florida would need some distinct productivity advantage, like cheaper fuel prices, cheaper labor, a more efficient production system. This comparative advantage would then exist only in relation to the trading of oranges between Florida and California.

If one were to then compare Florida and New Mexico, then the particular circumstances between Florida and New Mexico would have to be evaluated to see if Florida had the comparative advantage. If New Mexico had some production advantage over Florida in the production of oranges, then while Florida may have a comparative advantage over California, it would not have a comparative advantage over New Mexico. And the circumstances between orange trade between New Mexico and California can be analyzed as well and it may be possible that the circumstance are such that while Florida has the comparative advantage over California, and New Mexico has the comparative advantage over Florida, it could still be possible for California could have the comparative advantage over New Mexico. What matters is the economic relationship between the two trading partners and the production costs in relations to each other.