4.1B Comparative Advantage & Its Limitations (HL)

Absolute Advantage

1. The theory of absolute advantage, from Adam Smith, says a country is more efficient if it makes a good using fewer resources, or makes more of it with the same resources.
2. Imagine two countries, A and B, each with one worker who in a day makes only beef or only leather, with daily output shown below.

1. Country A has an absolute advantage in beef, making more (8 versus 5) with the same one worker.
2. Country B has an absolute advantage in leather, making more (4 versus 2) with the same worker.
   1. This is reciprocal absolute advantage, but a country could instead have an absolute advantage in every good.
3. Each row can be turned into a straight-line PPC, which keeps opportunity cost constant along the curve, as subtopic 1.1.3 explained for concave, straight, and convex PPCs.
   1. For country A, 8 beef with 0 leather gives the vertical intercept and 2 leather with 0 beef gives the horizontal intercept, and joining them draws A's PPC.
4. On the diagram, A's PPC reaches higher up the beef axis, showing its absolute advantage in beef, while B's extends further along the leather axis, showing its absolute advantage in leather.

1. If each country specialises where it has an absolute advantage, A makes only beef and B only leather, so A exports beef and B exports leather.
2. This sends each good to whoever makes it more efficiently, so world output rises from the same resources and trade lets each country consume beyond its own PPC.

Comparative Advantage

1. Absolute advantage explains only a small part of the gains from trade.