Absolute advantage: Complications and Limitations

Absolute advantage

Absolute advantage: Principle of Absolute Advantage

Absolute advantage: Income, and Wages

There are several caveats to the foregoing analysis, some of which we discuss now. 

Absence of absolute advantage: The example discusses a situation where one country has an absolute advantage in the production of one good and the other country in the production of another good. It is frequently argued that developing countriesmay lack the technology to gain an absolute advantage in the production of any good, such that they cannot possibly compete on the global market and benefit fromfree trade (in table 1, for example, if theUnited States needs four laborers to produce one unit of food). This conclusion is wrong, however, according to David Ricardo’s model of comparative advantage (which emphasizes labor as the primary production factor and attributes the costs and benefits of trade to the differences in opportunity costs among countries), since technologically disadvantaged countries can compete on the global market by paying lower wages. It turns out that absolute advantage is neither a necessary nor a sufficient condition for exporting a certain good and gaining from international trade. 

More factors of production: In reality, goods are produced using several factors of production simultaneously, such as capital, land, and various types of labor. Usually, goods then cannot be ranked according to absolute advantage as their production in one country requires more of one input and simultaneously less of another input than in another country. These issues are analyzed in theHeckscher- Ohlin (factor abundance) theory of international trade. 

Intra- versus interindustry trade: The example discusses interindustry trade, which is the exchange of one type of good (cars) for another type of good (food). Many countries engage in intraindustry trade, the exchange of similar types of goods (e.g., simultaneously exporting and importing car parts). This type of trade is becoming evermore important. It can be based on market power and economies of scale, as analyzed in New Trade Theory.