Difference between absolute advantage and comparative advantage? (1 Viewer)

[sk8ie_boi]

So absolute advantage is a situation where a country with a given level of resources can produce more output than another country with the same level of resources. So therefore saying it's more efficient .. I understand this okay .. But ..

Comparative advantage is based on the concept of opportunity cost of production. If a country can produce a good with greater comparative efficiency as measured by opportunity cost it should specialise and engage in trade. So again, isn't this what they mean by efficiency? .. how is this different to absolute advantage?

 

[sk8ie_boi]

a country may have the resources necessary to produce the goods it wants, but some country may be able to do it more cheaply which is called absolute advantage but say a country can be efficient, but it would be much better off to produce something else ... umm okay .. I'm not making any sense anymore .. i sorta understand now, but i can't put it words .. i still don't really understand comparative advantage

 

[blue16]

yeah i dont understand either. All i know is that Comparative advantage is the economic principle that nations should specialise in the areas of production in which they have the lowest opp. cost and trade with other nations so as to maximise both nations standard of living.

 

[sk8ie_boi]

okay .. i think i can give an example .. say country x can produce alpha and beta more efficient than country y .. so therefore by absolute advantage country x should export both alpha and beta to country y .. but with comparative advantage .. the opportunity cost to produce alpha is much cheaper than producing beta .. then country x would export alpha and import beta ...

 

[blue16]

great example. Thanks for that. i understood comparative adv. but not absolute, thanks and good luck

 

[mattchan]

A)

If Japan can produce Cars better than Australia by using lesser resources, than Japan has an absolute advantage over Australia.



B)
A country should specialise in the production of a good or service, in which they have the lowest opportunity cost - as in, the production of one good would not enormously forgo the opportunity to produce another good. For example, Australia has a comparative advantage in wool, which is why we specialise in the production of this good because we can produce it more efficiently than other nations - and also we wouldnt have to sacrifice the production of wool for another good/service such as wheat or something.

Either way, both concepts relate to the fact that by having a comparative or absolute advantage, you are more efficient than another country.

 

[klaw]

Yes if a country has an absolute advantage in producing something over another country then they are more efficient than the other country. However, if the opportunity cost for producing a unit of one product is greater in one country than another, then both countries can benefit from specialisation and trade.

Take this as an example:
Country A
Cars: 60
Computers: 60

Country B
Cars: 40
Computers: 20

Country A has an absolute advantage in both the production of cars and computers. However, the opportunity cost of 1 unit of computers = 1 unit of cars in country A but in country B the OC of 1 unit of computers = 2 units of cars. Currently, without specialisation, 100 units of cars and 80 units of computers are being produced. If Country A devotes all resources to producing cars and Country B specialises in computers, then 120 cars would be produced and 40 computers would be produced, which is inefficient because the OC of producing computers in country B is higher than in Country A and the OC of producing cars is higher in Country A than Country B. However, both countries would benefit from trade if the countries specialised in the products with the least OC of the two countries. E.g. When Country A specialises in making computers and Country B specialises in making cars, then 120 computers and 80 cars would be produced. This means that as a result of specialisation and trading, 20 additional computers have been produced.