Introduction
Engagement in international trade largely benefits all nations around the globe. Indeed, a country can enjoy imported goods that cannot be produced at home or are less expensive than domestic commodities. In this regard, such an advantage of the worldwide exchange of goods is quite self-evident. However, the existence of benefits related to international trade in the situation when a certain nation can produce a range (or all) of products better and cheaper than other countries is not as clear. For this reason, it is necessary to discuss why even when a country can outperform its partners significantly, trade can still be advantageous.
Absolute Advantage vs. Comparative Advantage
To begin with, the two central international trade concepts should be explained, namely absolute advantage and comparative advantage. The former implies that the country can produce something more efficiently or at a lower cost than its competitors. For instance, China is a modern leader in the production of electronic goods due to large capital investments in manufacturing and cheap labor. On the other hand, comparative advantage refers to the nation’s ability to produce certain products and services more effectively than others. For example, consider the economic structure of the Southern United States during the antebellum period. Due to legalized slavery, fertile lands, and great expertise in agriculture, it was much more profitable for plantation owners to produce cotton rather than attempt to develop manufacture, similar to New England (Shi, 2016). Therefore, it can be said that the Southerners preferred to solely concentrate on the industry that was comparatively advantageous at that time.
From the analysis above, it is seen that the two concepts, although interrelated from a certain perspective, are nevertheless quite separate from one another. Thus, it is not possible to say that having a comparative advantage in the production of something is positively or negatively associated with absolute advantage and vice versa. As such, a country may have an absolute advantage in manufacturing certain commodities, but it may not be its comparative advantage.
Canada is a good example to portray the essence of absolute and comparative advantages. The country’s farmers enjoy a relatively low cost of land, which makes agriculture more profitable per labor unit compared to other industries. However, Carmichael (2021) states that the lack of leverage, such as good investments, does not allow it to have an absolute advantage against many other international partners. In other words, the country does not realize the potential of its comparative advantage.
Unexpected Benefits
However, the idea that the country should concentrate on comparatively advantageous production may be against intuition as it is considered that the more diversified commodity line is always better. Yet, a simple mathematical calculation can help to understand why it is the case. For instance, consider country A which has an absolute advantage in producing two goods, namely computers and earphones, against country B. Imagine next that, for the former, it takes four and one workers accordingly to produce 1000 units of each good whereas for the latter – five and four employees respectively at a constant time. Therefore, if each country has only 20 available workers, then nation A would produce either 5000 computers and 0 earphones or 4000 computers and 4000 earphones…, or 0 computers and 20000 earphones. Contrary, country B can produce either 4000 computers and 0 earphones…, or 0 computers and 5000 earphones. As a result, it is seen that the countries can achieve the highest mutual and individual benefits if country A concentrates on the production of earphones and country B – on computers. Thus, it is clear why facilitating international trade is very important.
Conclusion
In summary, the two important concepts of comparative and absolute advantage were discussed. While the former refers to the most efficient industry within a certain country, the latter indicates some industries’ higher productivity in one nation than the other. Additionally, it was shown that concentrating on one’s comparative advantage can bring the utmost mutual and individual benefits. Therefore, it was concluded that promoting barrier-free international trade is of high importance.
References
Carmichael, K. (2021). Food is the new oil, even if most of the world — including Canada — hasn’t realized it yet. Financial Post.
Shi, D. E. (2016). America: A narrative history (11th ed.). WW Norton & Company.