Trade - Absolute vs. Comparative Advantage
Someone (or country, organization, etc.) who is the best at doing something is said to have an absolute advantage.
A person (or country, organization, etc.) has a comparative advantage at producing something if they can produce it at the lowest opportunity cost (giving up the least).
So what’s the difference and why is it important? Well, a country might be the best at making all kinds of things (absolute advantage), but by trying to do everything, they take away more time and resources from the most valuable thing they could be doing. On the flip side, a country might be bad at making almost everything, but still have a comparative advantage in doing what they’re least bad at!
Comparative advantage is the whole basis for trade and specialization. Everyone is better off and you get more efficiency when people (or countries, etc.) focus on their comparative advantage and trade for the other things they want/need. The key to this efficiency is to not compare their absolute advantages, but to compare their opportunity costs.
For example, Lebron James has an absolute advantage in basketball. But did you know he’s also great at lawn mowing? His neighbor, a 14 year old kid, is not as good at doing either. Now Lebron could spend 2 hours mowing his lawn, but he’d give up the chance to make $10 million making a Nike commercial. His neighbor takes 4 hours to mow the lawn, but he’d only be giving up $8 an hour working at McDonald’s. So who should do what? Who’s got the absolute advantage for basketball? Lawn mowing? Who’s got the comparative advantage in basketball? Lawn mowing?
So how would this relate to international trade? Should we even be manufacturing T-shirts in the U.S.? Is that the most valuable/efficient use of our resources? What else could those workers be doing instead? Considering that on average, it costs taxpayers $145,000 to educate a child in the U.S. (from 1st to 12th grades), is standing over a sewing machine all day really the best use of our human capital? On the other hand, how many people who lost low-skilled factory jobs ended up with a higher-skilled, better paying job?