Absolute and Comparative Advantages
To understand the principles and differences between absolute and comparative advantage the above conceptual demonstration considers two countries having the same size, the same amount of resources and both having to use without trade half of their resources in two economic sectors (textiles and steel).The only difference is their productivity in different economic sectors since if these two countries had the same resources and the same productivity, there would be no economic rationale to trade. The main rationale is that under these conditions trade results in more output and thus a more efficient use of resources. However, the outcomes differs if the  productivity advantages of each country are absolute or relative:
  • Absolute advantages. Without trade, both countries (A & B) must use half their resources to produce textiles and steel. A total of 15 units of textiles and 15 units of steel are produced; 30 units. With trade, each country is able to focus on the economic sector in which it has an absolute advantage; the most productive. With this shift in production the output of textiles (entirely produced by country A) increases to 25 while the output of steel (entirely produced by country B) increases to 20, for a total of 45 units. This represents a 50% increase in productivity, which would involve a greater quantity of goods available on markets at a lower price.
  • Comparative advantages. This examples assumes that country B has absolute advantages in both economic sectors. It can produces more effectively textiles and steel than country A. Without trade, country A produces 5 units of textiles and steel, while country be produces 10 unites of textiles and 12.5 units of steel. With trade, the matter becomes in which sector should country A produces since it is unable to compete in both economic sectors. It will focus in the sector in which it has the most comparative advantages. Its comparative advantages are -5 for textiles (5 - 10) and -6 for steel (4 - 10), so it has essentially no choice than to shift its production in textiles since it is the sector in which it is the least disadvantaged (-5 versus -6). Therefore, country A will be able to provide 10 output units of textiles which enables country B to free the equivalent resources of producing 10 units of textiles less. This involves having 50 units of resources now being available since its costs country B 5 resources units to produce one textile unit. Out of these 50 resource units, 20 units must be used to produce the 5 units of steel that country A is no longer producing, leaving 30 units that can be used to produce an additional 7.5 units of steel. The total output increases from 42.5 units to 43.5 units. Thus, even if a country has no absolute advantages, the principle of comparative advantages results in higher gains in productivity through trade as a country can focus on the economic sector it is the least disadvantaged in and enable the trade partner to free resources and focus on its economic sector having the higher comparative advantage.