Absolute Advantage

When countries cannot produce desirable goods at all, the advantages of trade are obvious. For example, Britain is too cold to produce coffee, but posesses reserves of oil in the North Sea. Jamaica, on the other hand, can easily grow coffee, and has no domestic petroleum. The mutual advantage of trade between Jamaica and Britain is obvious.

In other cases, the advantages might be less obvious but are still present. For example, Germany and France are similar-sized economies, with similar social and climatic conditions and natural resources. Both nations manufacture automobiles. However, Germany posesses factories and specialized labor for the production of expensive, high-performance luxury and sports cars like Porches. France, on the other hand, posesses factories and specialized labor for the production of inexpensive, everyday cars like Citroens. Producing an additional Porshce in Germany is much cheaper than establishing a whole new production line in France. Germany has an absolute cost advantage in the production of Porshces. Similarly, France has an absolute advantage in the production of Citroens. It is to Germany and France’s mutual benefit to trade Porches for Citroens for the same reason that Jamaica and Britain would trade coffee and petroleum.

But what if France has unemployed resources? Wouldn’t it be better to put the unemployed resources to work building high-performance cars within France? The answer is no: In the two-country example, ceasing imports of Porsches will also cause exports of Citroens to fall.

Absolute advantage also explains the movement of resources across national boundaries. Where an absolute advantage exists in a given industry, and where resource movement is possible, resources will tend to move to where they can find the most productive employment.