The key difference between absolute cost advantage and comparative cost advantage is that absolute cost advantage focuses on manufacturing a product at the lowest cost to gain competitive advantage whereas comparative cost advantage focuses on manufacturing a particular product at a lower opportunity cost to ensure relative productivity than other businesses.
Absolute cost advantage and comparative cost advantage are two concepts that are widely used in economics and international trade.
CONTENTS
1. Overview and Key Difference
2. What is Absolute Cost Advantage
3. What is Comparative Cost Advantage
4. Similarities Between Absolute Cost Advantage and Comparative Cost Advantage
5. Side by Side Comparison – Absolute Cost Advantage vs Comparative Cost Advantage in Tabular Form
6. Summary
What is Absolute Cost Advantage?
The absolute cost advantage is used to define the profit or cost break one company has over another. In other words, Absolute cost advantage defines a principle in which one business organization can manufacture a product at a higher quality and a quicker rate for a higher profit than another competing business. Further, this figure consists of inexpensive sources of raw materials, control of proprietary knowledge through patents, less expensive manufacturing plants or assembly lines, lower transportation costs from supplier to buyer etc.
In economics, the principle of absolute cost advantage refers to the ability of a business to manufacture and sell more of a good or service than its rivalry, using the same amount of resources. An entity with an absolute advantage can manufacture a product or service at a lower absolute cost per unit using a smaller number of inputs or a more efficient process than another plant manufacturing the same good or service.
In simple terms, absolute cost advantage occurs when a nation can manufacture particular goods at a lower cost than another nation. For example, due to the climatic advantages in Columbia, it produces coffee at a lower cost than other countries.
What is Comparative Cost Advantage?
The comparative cost advantage is the ability to manufacture goods and services at a lower opportunity cost, not necessarily required at a higher volume or quality. Furthermore, a comparative advantage offers the business the ability to sell goods and services at a lower price than its rivalry and ensure stronger sales margins.
In simple terms, if a nation can manufacture a particular good at a lower opportunity cost (by losing an opportunity to manufacture other goods) than any other nation, then it is said to have a comparative cost advantage.
The theory of comparative cost advantage was first introduced by David Ricardo in the year 1817. According to comparative cost advantage theory, countries will involve in trade with one another, exporting the goods that they have a relative advantage in productivity.
By using comparative cost advantage, countries can decide which products to manufacture for international trade. For instance, wine is produced in Portugal very cheaply while England produced cloth at a very low cost. Later on, Portugal stopped producing cloth while England stopped producing wine, understanding the benefit of trading.
What are the Similarities Between Absolute Cost Advantage and Comparative Cost Advantage
- Both absolute cost advantage and comparative cost advantage are equally important in economics and international trade.
- These concepts are widely used and mostly influence how and why countries and businesses offer resources for the manufacture of particular commodities.
- However, absolute cost advantage refers to the uncontested supremacy of a country in manufacturing a particular commodity better; comparative cost advantage refers to opportunity cost as a factor for analysis in choosing between various possibilities for manufacturing.
What is the Difference Between Absolute Cost Advantage and Comparative Cost Advantage?
The key difference between absolute cost advantage and comparative cost advantage is that absolute cost advantage focuses on manufacturing a product at the lowest cost to gain competitive advantage whereas comparative cost advantage focuses on manufacturing a particular product at a lower opportunity cost to ensure relative productivity than other businesses.
Absolute cost advantage provides the ability to produce more goods for a cheaper cost with the same amount of resources in comparison to other businesses while comparative cost advantage provides better products than other businesses. In absolute cost advantage, trade is not mutually beneficial; it only benefits the business with absolute advantage; however, in comparative cost advantage, trade is mutually beneficial. So, this is another difference between absolute cost advantage and comparative cost advantage.
Summary – Absolute Cost Advantage vs Comparative Cost Advantage
The key difference between absolute cost advantage and comparative cost advantage is that absolute cost advantage is the ability of a business to manufacture more products with the same amount of resources than another business whereas comparative cost advantage is the ability of a business to manufacture products better than another business with the same amount of resources. These concepts mostly influence how and why countries and businesses offer resources to the manufacture of particular commodities.
Reference:
1. Chappelow, Jim. “Absolute Advantage Definition.” Investopedia, Investopedia, 6 Sept. 2019, Available here.
2. “Define: What Is Absolute Cost Advantage? – IContact Glossary.” IContact, Available here.
Image Courtesy:
1. “Absolute advantage” By Nber85 – Own work (CC BY-SA 3.0) via Commons Wikimedia
2. “1444957” (CC0) via Pxhere
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