How Do the Theories of Absolute Advantage and Comparative Advantage Differ?
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In Adam Smiths theory of absolute advantage, each country exports the product in which the country has the higher labour productivity—-the number of units of output that a worker can produce in one hour. However, Smiths theory does not explain why trade could still carry on between two countries when one of them has absolute advantage in both of the exchanging products. To fill that empty, Ricardo demonstrated the principle of comparative advantage: A country will exports the goods and services that it can produce at a low opportunity cost and import the good and services that it would otherwise produce at a high opportunity cost.
In Smiths theory, the motive of trade is that there are absolute differences between two countries productivity over a certain kind of product. For example, one labour working an hour in country A can produce 2 wheats and 1 cloth, on the same condition in country B, 1wheats and 2 cloths are made. Thus, Smith said that A has absolute advantage in producing wheat while country B has absolute advantage in producing cloth. And, country A should export wheat to B and import cloth from B. However, Ricardos theory just put the Smiths furthermore. The key word of comparative advantage is “comparative”, which means “relative”, in other words, “not necessarily absolute.” Even if one country is absolutely more productive at producing everything, there are still some reasons for that country to trade with others since it is definitely not economically reasonable for that country to produce any product on a relatively higher opportunity cost. For instance, country A can use one labour working an hour to produce 4wheats and 3cloths, Country B can produce 1wheat and 2cloths. Clearly, Country A has absolute advantage in both products, but the opportunity cost for A to produce cloth is relatively higher than to produce wheat, and the opportunity cost for B to produce wheat is relatively higher than to produce cloth. Therefore, if the world price is 1wheat equals 1cloth, country A should concentrate on wheat production and trade wheat for cloth from country B. Both countries will gain from the trade from the saving of the opportunity cost.