Absolute & Comparative Advantage

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes 

Absolute Advantage

Absolute advantage occurs when a country can produce a particular good or service more efficiently than another.

e.g. The OPEC countries can produce oil a lot more efficiently than other countries who have not supplied this commodity before. Columbia is known to produce coffee more efficiently than some of the developed countries of the world such as the U.K.

Comparative Advantage

Comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another.

Limitations of the theory

• Comparative Advantage assumes there are no transport costs – however in reality there are and these could lower the comparative advantage
• Assumes goods are homogenous – this is unlikely to be the case in real life as most products are differentiated; this makes it harder to conclude whether a firm whether a country has comparative advantage
• Assumes factors of production are flexible – it assumes there are no tariffs or trade barriers, making it easier for factors of production to be variable rather than fixed
• Assumes costs are constant – while assuming costs are constant, it also assumes that there are no economies of scale

Quick Fire Quiz – Knowledge Check

1. Distinguish between Absolute Advantage and Comparative Advantage (4 marks)

2. Identify and explain four limitations of the Comparative Advantage theory (8 marks)

Next Revision Topics

• Globalisation
• Patterns of Trade
• Terms of Trade
• Trading Blocs
• Specialization & Trade
• The case against Protectionism
• Economic Growth
• Gross National Income
• Strategies to promote Growth & Development
• World Trade Organisation

A Level Economics Past Papers

• AQA
• Edexcel
• OCR
• WJEC