Competitive Advantage

According to the classic model of international trade introduced by David Ricardo (19th-century English economist) to explain the pattern and the gains from trade in terms of comparative advantage, it assumes a perfect competition and a single factor of production, labor, with constant requirements of labor per unit of output that differ across countries. The basis for trade in the Ricardian model is the differences in technology between countries. As a result, there are two different ways to describe technology differences: the first method, called absolute advantage, is the way most people understand technology differences; and the second method, called comparative advantage, is a much more difficult concept.

Absolute advantage is the simplest measure of economic performance. It is the ability to produce a good at a lower cost, in terms of real resources than another country. Absolute Advantage is neither necessary nor sufficient for a country to export a good. In other words, a country has an absolute advantage economically over another, in a particular good, when it can produce that good more cheaply or it can produce more of the good than another country can, with the same amount of resources. In fact, absolute advantage appears when multiple products are being considering. For example, if the country “A” has an economic advantage against the country “B” at producing the product “X”, and the country “A” has an economic advantage against the country “B” at producing the product “Y”, so “A” has an absolute advantage against “B” with respect to products X and Y.

In fact, a country has an absolute advantage over it trading partners if it is able to produce more of a good with the same amount of resources or the same amount of a good with fewer resources. For example, Zambia has an absolute advantage over many countries in the production of copper because of the existence of reserves of copper ore or bauxite. So in terms of the production of goods, there are obvious gains from specialization and trade, if Zambia produces copper and exports it to those countries that specialize in the production of other goods or services. In other words, some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage. They are inefficient in producing. The theory of comparative costs argues that it is better for a country that is inefficient at producing a good or service to specialize in the production of that good it is least inefficient at, compared with producing other goods.

The theory of comparative advantage is a pure theory based upon a set of assumptions, which is an abstraction from the complexities of the real world. This theory explains why it can be beneficial for two parties (countries, regions, individuals) to deal, even though one of them may be able to produce every