A party has an absolute advantage if producing a good absorbs fewer resources than another party would require to produce the good.
But what if Alaskans had absolute advantages in everything–if they could do every task faster and easier than Brazilians? You might think that Alaskans must lose if Brazilians gain from trade but, surprisingly, both sides can gain. Suppose, for example, that a lawyer whose fees run $250 an hour types twice as fast as her secretary, whose wage is $12 hourly. She still gains by hiring the secretary. Despite her absolute advantage in typing, the lawyer’s comparative advantage lies in practicing law. Similarly, many professional athletes probably have absolute advantages in lifting and carrying compared to most furniture movers. Nevertheless, few pro athletes move their furniture when traded between teams. Athletes and movers both gain by concentrating in their own areas of comparative advantage.
It is important to notice that, in these last two examples, absolute advantages do not translate into comparative advantages. Indeed, the lawyer’s absolute advantage in typing still yields a comparative disadvantage in secretarial work, and, although furniture movers have absolute disadvantages at both athletics and furniture moving, their absolute disadvantage is relatively the least in moving furniture, so this is an area of comparative advantage for them.
U.S. exports have recently been swamped by imports, and many industries once dominated by U.S. firms have been invaded by aggressive foreign exporters. Does this mean that we are losing all of our comparative advantages? No! Being comparatively disadvantaged in all areas is impossible because relative magnitudes determine comparative advantage. Would you like to read a Focus that identifies a few of the many areas in which U.S. producers continue to enjoy a substantial competitive edge?
Roots of Comparative Advantage
Relative resource abundance is often cited as driving comparative advantage. It seems natural for fertile soil to yield advantages in agriculture, for vast oil reserves to give the Middle East an edge in oil, and for China’s low-wage workers to yield advantages in labor-intensive goods. But why is Argentina with all its natural resources relatively poor, while Switzerland, with few natural resources, enjoys one of the world’s highest standards of living? And why is Pakistan’s economy stagnant while Singapore thrives despite greater population density and fewer natural resources?
The key to such riddles is that how resources are combined is as crucial as the mix of resources available. Comparative advantage is also molded by: (a) climate and location, (b) institutional and cultural factors, (c) government policies, (d) the skills and education of the populace, (e) the vigor of internal competition and size of domestic markets, and (f) the ability of domestic entrepreneurs to innovate and cultivate global markets.
Comparative advantage is only one of several potential sources of gains from trade. If you would like to find out more about the ways trade can be beneficial, open this link to the gains from trade.