International Trade

Lessons

Senior 6 · Economics

International Trade

5 lessons

Lesson 2 of 5

Absolute and comparative advantage

25 min

A puzzle to start

Suppose a large neighbour can produce both coffee and maize with fewer resources than Rwanda. Is there any point in the two countries trading? Adam Smith's answer in The Wealth of Nations (1776) only covered the case where each country is better at something. David Ricardo, in On the Principles of Political Economy and Taxation (1817), showed that trade pays even when one country is better at everything. This lesson works through both theories with production tables and production possibility frontiers (PPFs), which you met in Senior 4.

Definition

Absolute advantage: a country has an absolute advantage in a good when it can produce more of it than another country with the same resources (or the same amount with fewer resources).

Example: if one worker-day produces 6 bags of coffee in country A but only 2 in country B, A has the absolute advantage in coffee.

Definition

Comparative advantage: a country has a comparative advantage in a good when it can produce it at a lower opportunity cost than another country, that is, by giving up less of the other good.

Example: if a tonne of coffee costs Rwanda 1.5 tonnes of maize but costs Tanzania 3 tonnes, Rwanda has the comparative advantage in coffee.

Definition

Opportunity cost (from Senior 4): the next best alternative given up. On a straight-line PPF with maximum outputs $X_{\max}$ and $Y_{\max}$ ,

\text{opportunity cost of 1 unit of } X = \frac{Y_{\max}}{X_{\max}} \text{ units of } Y.

1. The theory of absolute advantage

Two countries each have 100 workers. The table shows what one worker can produce in a day (illustrative figures).

Output per worker per day	Coffee (bags)	Maize (bags)
Country A	6	2
Country B	2	6

A has the absolute advantage in coffee (6 > 2) and B in maize (6 > 2). If each country splits its workers equally between the goods, and then each specialises completely:

	Coffee (bags)	Maize (bags)
A, before specialisation (50 workers on each)	$50 \times 6 = 300$	$50 \times 2 = 100$
B, before specialisation	$50 \times 2 = 100$	$50 \times 6 = 300$
World total before	400	400
A, specialised in coffee	$100 \times 6 = 600$	0
B, specialised in maize	0	$100 \times 6 = 600$
World total after	600	600

With the same 200 workers, world output rises by 200 bags of each good. Trade then lets each country share in that gain. The weakness of Smith's theory is that it says nothing when one country has the absolute advantage in both goods.

2. The theory of comparative advantage

Now take two illustrative economies, Rwanda and Tanzania, each able to produce coffee and maize. The production possibility tables show the combinations each can produce when all its resources are fully used. (These are teaching figures, not real data.)

Rwanda: combination	A1	A2	A3	A4	A5
Coffee (tonnes)	40	30	20	10	0
Maize (tonnes)	0	15	30	45	60

Tanzania: combination	B1	B2	B3	B4	B5
Coffee (tonnes)	60	45	30	15	0
Maize (tonnes)	0	45	90	135	180

Tanzania has the absolute advantage in both goods (60 > 40 coffee; 180 > 60 maize). Now compare opportunity costs:

Rwanda:

1 \text{ t coffee costs } \frac{60}{40} = 1.5 \text{ t maize}

1 \text{ t maize costs } \frac{40}{60} = \frac{2}{3} \approx 0.67 \text{ t coffee}

Tanzania:

1 \text{ t coffee costs } \frac{180}{60} = 3 \text{ t maize}

1 \text{ t maize costs } \frac{60}{180} = \frac{1}{3} \approx 0.33 \text{ t coffee}

Opportunity cost of	Rwanda	Tanzania	Lower cost, so comparative advantage
1 t coffee	1.5 t maize	3 t maize	Rwanda
1 t maize	0.67 t coffee	0.33 t coffee	Tanzania

Rwanda should specialise in coffee and Tanzania in maize, even though Tanzania is better at both. Because the frontiers are straight lines, opportunity costs are constant, and the two countries' costs differ: that difference is all trade needs.

Worked example 1: the gains from specialisation and trade

Before trade each country must produce everything it consumes. Suppose Rwanda chooses A3 (20 t coffee, 30 t maize) and Tanzania B3 (30 t coffee, 90 t maize). World output is $20 + 30 = 50$ t coffee and $30 + 90 = 120$ t maize.

Specialise. Rwanda produces only coffee (A1: 40 t). Tanzania must still make some coffee for the world to have at least 50 t, so it moves to B4 (15 t coffee, 135 t maize). World output is now $40 + 15 = 55$ t coffee and $0 + 135 = 135$ t maize: a gain of 5 t coffee and 15 t maize from the same resources.

Trade at 1 t coffee for 2 t maize. Rwanda exports 20 t coffee and receives $20 \times 2 = 40$ t maize.

	Consumes before trade	Consumes after trade	Gain
Rwanda	20 coffee, 30 maize	$40 - 20 = 20$ coffee, 40 maize	+10 maize
Tanzania	30 coffee, 90 maize	$15 + 20 = 35$ coffee, $135 - 40 = 95$ maize	+5 coffee, +5 maize

Both countries end up consuming more than they could produce alone.

The same result on the PPF diagrams. Each country produces at P, on its own frontier, and trades along the dashed trade line to consume at C, a point outside its frontier that it could never reach by itself.

Worked example 2: a table of labour hours (inputs, not outputs)

The hours of labour needed to make ONE unit are (illustrative):

Hours per unit	Rice (1 bag)	Shirts (1 shirt)
Country X	4	8
Country Y	6	9

Absolute advantage: X needs fewer hours for both goods, so X has the absolute advantage in both.

Opportunity cost of one shirt = the rice given up in the same hours:

\text{X: } \frac{8}{4} = 2 \text{ bags of rice}

\text{Y: } \frac{9}{6} = 1.5 \text{ bags of rice}

Y gives up less rice per shirt, so Y has the comparative advantage in shirts, and X in rice (X's cost of a bag of rice is $\frac{4}{8} = 0.5$ shirt, against Y's $\frac{6}{9} \approx 0.67$ shirt).

Warning

Read the table's heading first. In an output table (units per worker), the bigger number means the advantage. In an input table (hours or workers per unit), the SMALLER number means the advantage. Many exam answers are lost by treating an input table as an output table.

Assumptions and limitations of the theory

The theory assumes…	…but in reality
Two countries and two goods	Many countries trade thousands of goods, though the logic still holds
Constant opportunity costs (straight-line PPF)	Costs usually rise as a country specialises (a curved PPF), so specialisation is incomplete
No transport costs or trade barriers	Freight, tariffs and quotas can wipe out the gain, especially for a landlocked country
Factors move freely between industries at home	A coffee farmer cannot become a maize farmer, or a factory worker, overnight
Full employment and perfect competition	Unemployment and monopoly are common
Comparative advantage is fixed	It can be built: skills, infrastructure and investment create new advantages (dynamic comparative advantage)

There are also risks in specialising too far: a country that relies on a few exports suffers when their world prices fall, and a country that stops growing food depends on others to feed it.

Case: Rwanda's coffee and tea

Rwanda's high altitude, fertile hill soils and regular rainfall give it a natural comparative advantage in high-quality coffee and tea. In the fiscal year 2024–25 it exported 20,509 tonnes of coffee worth US$116.2 million and 37,693 tonnes of tea worth US$111.0 million (BNR). Dividing value by volume gives the average price received per kilogram:

\text{coffee: } \frac{116.2 \times 10^{6}}{20\,509 \times 10^{3}} \approx 5.67 \text{ US dollars per kg}

\text{tea: } \frac{111.0 \times 10^{6}}{37\,693 \times 10^{3}} \approx 2.94 \text{ US dollars per kg}

But the same data show the risk: coffee earnings fell by 32.1% in 2023–24 and then rose by 47.6% in 2024–25 (BNR). Both the harvest and the world price moved: in 2024–25 the volume exported rose by 24.5% and the average price received by 18.6%. Earnings that swing like this make planning hard for farmers and for the government.

Tip

The one-line test. Absolute advantage compares amounts; comparative advantage compares what is given up. Work out both opportunity costs for both countries, then circle the smaller one in each row: that country specialises in that good.

Important

Discuss. Rwanda has a comparative advantage in tea and coffee. Should it specialise in them as far as possible? In your answer consider food security, the swings in world prices shown above, and whether Rwanda can build new comparative advantages, for example in services.

EconplusDal, "Comparative Advantage - Why Does Trade Take Place?" (about 10 minutes). A two-country, two-good example worked through with opportunity costs and PPFs, pitched at A-level. Compare his method with the tables above.

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Practice

Distinguish between absolute advantage and comparative advantage.
In one day a worker in country P makes 10 chairs or 5 tables; a worker in country Q makes 4 chairs or 4 tables. (a) Which country has the absolute advantage in each good? (b) Find each country's opportunity cost of one table. (c) Which good should each country specialise in?
Country R can produce 80 tonnes of beans or 40 tonnes of sorghum; country S can produce 60 tonnes of beans or 60 tonnes of sorghum (straight-line PPFs). Identify each country's comparative advantage, showing your working.
Explain why trade can benefit both countries even when one country has an absolute advantage in both goods.
It takes 3 hours to make a basket and 6 hours to make a mat in country M, and 5 hours and 15 hours in country N. Which country has the comparative advantage in mats?
Using the Rwanda–Tanzania example, show that at 1 t coffee = 2 t maize, Rwanda's consumption point C (20, 40) lies outside its PPF.
Give four limitations of the theory of comparative advantage.
"Comparative advantage is a gift of nature." Discuss with reference to Rwanda.

Show answersHide answers

Absolute advantage: producing more of a good with the same resources. Comparative advantage: producing a good at a lower opportunity cost than another country.
(a) P in chairs (10 > 4) and in tables (5 > 4): both. (b) P: $\frac{10}{5} = 2$ chairs per table; Q: $\frac{4}{4} = 1$ chair per table. (c) Q has the lower cost for tables, so Q specialises in tables and P in chairs (P's cost of a chair is 0.5 table, Q's is 1).
R: 1 t sorghum costs $\frac{80}{40} = 2$ t beans; S: 1 t sorghum costs $\frac{60}{60} = 1$ t beans. S has the comparative advantage in sorghum; R in beans (R's bean costs 0.5 t sorghum, S's costs 1 t).
What matters is opportunity cost. If costs differ, each country can specialise where its cost is lower, world output rises, and trading at a ratio between the two costs lets both consume more.
Cost of a mat in baskets: M $\frac{6}{3} = 2$ ; N $\frac{15}{5} = 3$ . M has the comparative advantage in mats (and N in baskets).
On Rwanda's PPF, maize $= 60 - 1.5 \times \text{coffee}$ . At 20 t coffee the most maize it could produce is $60 - 30 = 30$ t, but it consumes 40 t, so C lies outside the PPF.
Any four: transport costs; trade barriers; increasing opportunity costs; immobile factors; unemployment; the risk of over-specialisation; the model has only two goods and countries; advantages can change over time.
Partly true: climate and soil give Rwanda its advantage in tea and coffee. But much comparative advantage is created by investment in skills, roads, energy and institutions (dynamic comparative advantage), for example in services. A good answer gives both sides and a conclusion.

Sources and credits

Coffee and tea export values and volumes: Annual Report 2024–2025, Appendix 15, National Bank of Rwanda. Figures quoted as facts; unit values calculated by Ganzaa.
Photo: Tea plantation, Western Rwanda, Synkubito, via Wikimedia Commons, CC0 1.0.
Video: Comparative Advantage - Why Does Trade Take Place?, EconplusDal, embedded from YouTube.

Written by Ganzaa: the production tables, the PPF diagrams, the worked examples and the practice items. All production figures are illustrative.

1A puzzle to start

21. The theory of absolute advantage

32. The theory of comparative advantage

4Assumptions and limitations of the theory

5Case: Rwanda's coffee and tea

A puzzle to start

1. The theory of absolute advantage

2. The theory of comparative advantage

Assumptions and limitations of the theory

Case: Rwanda's coffee and tea