Why comparative advantage is superior to absolute advantage by Andrean Rendra

The standings of Comparative advantage and Absolute advantage has been debated for more than a century since the theory first originated but first before I explain why comparative advantage is more applicable than absolute advantage let me explain what they're both are. absolute advantage refers to the ability of a party to produce more of a good or service than competitors, using the same amount of resources. Here are some examples of how absolute advantage works:

-The United States produces 700 million gallons of wine per year, while Italy produces 4 billion gallons of wine per year. Italy has an absolute advantage because it produces many more gallons of wine (the output) in the same amount of time (the input) as the United States.

-Jane can knit a sweater in 10 hours, while Kate can knit a sweater in 8 hours. Kate has an absolute advantage over Jane, because it takes her fewer hours (the input) to produce a sweater (the output).

An entity can have an absolute advantage in more than one good or service. Absolute advantage also explains why it makes sense for countries, individuals and businesses to trade with one another. Because each has advantages in producing certain products and services, they can both benefit from trade. For example, if Jane can produce a painting in 5 hours while Kate needs 9 hours to produce a comparable painting, Jane has an absolute advantage over Kate in painting. Remember Kate has an absolute advantage over Jane in knitting sweaters. If both Jane and Kate specialize in the products they have an absolute advantage in and buy the products they don't have an absolute advantage in from the other entity, they will both be better off.

Comparative advantage is the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

here is David Ricardo's famous example:

In his example (Figure 1), Portugal could produce both wine and cloth with fewer resources (labor) than England could, but Portugal required **italic{relatively} more resources to produce cloth than wine. Ricardo used simple, deductive logic to show that since wine was harder to produce in England than cloth, both countries would increase both the volume and profits from trade if Portugal focused on wine production while England focused on the production of cloth, and they imported each other's product.

As the events of the past several years have shown lean, inventory-constrained global supply chains have become more vulnerable to highly disruptive supply-side shocks, such as natural disasters, political unrest, government instability, or exchange-rate volatility, in addition to the impacts of the usual demand-side shocks. One example is that of the extreme flooding in Thailand in October 2011, which devastated a key global center of hard disk-drive production. According to some estimates, Thailand produces more than 70 percent of the world's hard drives.

As Ricardo's theory suggests, the impact of a negative event in one source country can have wide-ranging impacts on trade flows across the world. This is especially true today since all advanced economies, as well as most developing ones, are highly integrated with each other via trade and financial markets. This connection can be seen through the highly correlated Purchasing Managers' Indexes (PMI) for manufacturing in the United States, the euro zone, the United Kingdom, China, and Brazil (Figure 2). While emerging markets have recently led the global expansion, they have not been able to decouple from the more advanced economies. This illustrates the fact that economic or political events in one country or region can have significant consequences around the world.

The key point is that companies that keep inventories lean and depend on a limited number of specialized centers of production remain highly vulnerable to supply chain disruptions. They can be negatively and significantly affected by small cracks in the supply chain that iterate throughout the international trade system.

Given that specialization of labor and production will continue to drive global trade integration, as noted by David Ricardo two centuries ago, supply chain managers must recognize that their trade networks will remain vulnerable, exposed to events in distant places where little control can be exerted. And since they cannot evade these global economic forces, supply chain managers should focus on what they can do: building key redundancies and backup plans, and avoiding an over-reliance on what may appear efficient but is in fact very fragile.

In conclusion of my Opinion Comparative advantage is Superior because it takes into accounts all factors of production unlike Absolute advantage which only focuses on labour, especially today in the contemporary world, where outsourcing became common practices, while production such as textile, clothing and other low technology goods have been moved to a less developed world and the more developed world specialize on medical goods, computer chips and so on it became clear that comparative advantage is superior against absolute advantage

Andrean Rendra

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sources: http://www.investopedia.com/terms/a/absoluteadvantage.asp

http://www.supplychainquarterly.com/columns/20121001-ricardos-comparative-advantage-still-holds-true-today/
http://www.investopedia.com/terms/c/comparativeadvantage.asp