Absolute vs. Comparative Advantage: Why Some Countries Just Do It Better

Absolute vs. Comparative Advantage: Why Some Countries Just Do It Better

Last time we talked about why international trade is basically the best thing since sliced bread (or since TikTok, depending on your priorities). Today, we're diving into the stuff that will seriously impress your IB examiners: absolute advantage vs. comparative advantage. Don't worry - I'll keep it as painless as possible!

Absolute Advantage: Being the Absolute GOAT

Imagine you and your mate are both trying to make TikToks and Instagram Reels.

You can make 10 banging TikToks in an hour, while your mate can only make 5. You can also make 8 decent Instagram Reels in an hour, while your mate can only make 4.

Congratulations, you have an absolute advantage in making BOTH types of content! You're simply better at creating social media content all around. You're the GOAT, the queen / king, the absolute legend.

In economics terms: A country has an absolute advantage when it can produce more of something using the same resources (or the same amount using fewer resources).

Real-Life Examples of Absolute Advantage

Saudi Arabia and Oil: Saudi Arabia can pump oil at about $3 per barrel, while it costs the US around $23 per barrel. Same product, way fewer resources needed. That's absolute advantage, baby!

Brazil and Coffee: Thanks to its perfect climate, abundant labour, and established farms, Brazil can produce coffee cheaper than almost anywhere else on the planet.

New Zealand and Dairy: Their climate and vast pastures mean they can produce milk products at lower costs than most countries. That's why their dairy exports dominate global markets (and why their butter is so much nicer than the stuff at your local Tesco).

Why Specialisation is Like Having a Good Squad for Group Projects

You know how in group projects, it works best when everyone does what they're good at? That's specialisation!

Economic theory suggests that if countries focus on producing what they're best at, global output increases and everyone wins.

Think about it: if Saudi Arabia focuses on pumping oil, Brazil on growing coffee, and New Zealand on making dairy, they'll all produce more efficiently than if they tried to do everything themselves.

Real-world example: When Apple focuses on designing iPhones in California but manufactures them in China, both countries benefit. The US leverages its design and technology expertise, while China uses its manufacturing capabilities. The result? Better, cheaper iPhones than if either country tried to handle the entire process alone.

But Wait... Here Comes: Comparative Advantage

Now, here's where it gets properly interesting (yes, economics can be very interesting).

Let's say you're still amazing at making both TikToks and Instagram Reels. But what if you have a history essay due tomorrow? You need to decide which type of content to skip making.

If you skip making TikToks, you lose 10 potential posts. If you skip making Reels, you lose 8 potential posts.

The opportunity cost of making Reels is higher! You'd be giving up more TikToks, which you're even better at.

This is comparative advantage in action: It's not about what you're absolutely best at - it's about what you give up the least to produce.

Comparative Advantage Explained

A country has a comparative advantage when it can produce something at a lower opportunity cost than another country.

Even if a country is rubbish at producing everything (sorry, harsh truth), it will still have a comparative advantage in whatever it's least bad at producing.

Mind-blowing, right? This is why international trade works even when some countries seem better at everything.

The Assumptions (AKA What Economists Conveniently Ignore)

Economics wouldn't be economics without some unrealistic assumptions! The theory of comparative advantage assumes:

• Production costs are only based on labour hours (as if machines and land don't matter)

• Only two countries and two products exist (sorry, real world with 195 countries and millions of products)

• Labour can easily move between industries (sure, because coal miners can become software developers overnight)

• Perfect knowledge exists (like everyone knows exactly what everything costs everywhere)

• No transportation costs (as if shipping stuff around the world is free)

• No trade barriers (tariffs and quotas? Never heard of them!)

What Gives Countries Their Comparative Advantage?

1. Factor Endowments (Basically, What You've Got)

Some countries hit the resource lottery:

• Canada's massive forests = cheap lumber and paper

• Russia's natural gas reserves = energy domination in Europe

• China's efficient factories and lower wages = manufacturing supremacy

2. Technology Levels (The Fancy Stuff)

Would you rather make TikToks with the latest iPhone or a Nokia from 2005? Exactly.

High-income countries can invest in cutting-edge tech that makes their workers super productive. Meanwhile, lower-income countries might be stuck using outdated equipment, forcing them to focus on basic commodities that don't require advanced tech.

3. R&D Investment (The Nerdy Stuff That Pays Off)

Countries that pump money into research and development and stay ahead of the game:

Real-life example: South Korea invested heavily in semiconductor R&D, and now Samsung dominates the global market. Twenty years ago, they weren't even in the conversation!

4. Price Stability (Keeping Things Chill)

If your inflation is out of control, your exports become more expensive and less attractive.

Real-life example: In 2018, Turkey's inflation hit 25%, making their exports suddenly more expensive and less competitive globally. Meanwhile, Switzerland, with its legendary price stability, maintained its competitive edge in watches and pharmaceuticals.

5. Exchange Rate Fluctuations (Currency Drama)

When your currency gets stronger (appreciates), your exports become more expensive for foreigners.

Real-life example: When Brexit referendum happened in 2016, the pound dropped in value, making British exports cheaper for international buyers. British fashion and food exports actually got a temporary boost!

The Limitations (Why Economists Don't Rule the World)

1. Comparative Advantage Isn't Fixed

The theory acts like comparative advantage is permanent, but it's as changeable as TikTok trends:

Real-life example: Japan dominated consumer electronics in the 1980s-90s (Sony Walkmans, anyone?). But by the 2000s, South Korea (Samsung, LG) and China took over as they developed better technology and more efficient production.

2. Trade Barriers Exist

The theory ignores tariffs, quotas, and other barriers that distort trade:

Real-life example: Despite America's comparative advantage in many agricultural products, they struggle to export to the EU because of strict regulations and barriers on GMO crops and hormone-treated beef.

3. Not Everyone Benefits Equally

The theory suggests everyone wins from trade, but the benefits aren't distributed evenly:

Real-life example: When the UK textile industry collapsed due to cheaper imports from Asia, entire communities in northern England were devastated, even if UK consumers benefited from cheaper clothes.

4. Transportation Costs Matter

Shipping stuff around the globe isn't free:

Real-life example: New Zealand may have a comparative advantage in dairy, but the cost of shipping fresh milk to Europe is so high that it eliminates much of that advantage for certain products.

The Rise and Fall of Comparative Advantage: Nothing Lasts Forever

Yesterday's Champions...

UK Textiles (Industrial Revolution): The UK dominated global textile production with its coal resources, skilled workers, and advanced machinery.

US Manufacturing (Post-WWII): After WWII, the US was manufacturing EVERYTHING - cars, steel, machinery - while Europe and Japan were rebuilding.

Japanese Electronics (1980s-90s): Sony, Panasonic, and Nintendo ruled the world of TVs, cameras, and video games.

South Korean Shipbuilding (1970s-90s): South Korea built massive container ships and oil tankers cheaper and better than anyone else.

Today's Reality...

UK Textiles: Moved to India and Bangladesh where labour is cheaper (that's why your Primark t-shirt costs £3).

US Manufacturing: Shifted to China, Mexico, and other countries with lower labour costs (that's why everything says "Made in China").

Japanese Electronics: Samsung (South Korea) and Chinese brands now dominate, offering similar quality at lower prices.

South Korean Shipbuilding: China became the world's largest shipbuilder with lower costs and massive state support.

The Takeaway for Your IB Exams

When you're answering exam questions on comparative advantage, remember:

1. Explain the difference between absolute and comparative advantage clearly

2. Use real-world examples (examiners LOVE this)

3. Discuss the limitations of the theory (critical thinking = higher marks)

4. Show how comparative advantage changes over time (demonstrates deeper understanding)

Stay well