Absolute advantage is the ability to produce a good using fewer inputs than another producer, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer (reflecting the relative opportunity cost). Comparative advantage is more important for trade.
How do you find absolute and comparative advantage?
- Make a table like Table 19.6.
- To calculate absolute advantage, look at the larger of the numbers for each product.
- To calculate comparative advantage, find the opportunity cost of producing one barrel of oil in both countries.
When does a country have a comparative advantage?
According to his theory, a country or business entity is said to have a comparative advantage in the production of goods or services when it can produce/deliver that particular good or services at a comparatively lower opportunity cost than any other country.
Which is an absolute advantage of a country?
A country has an absolute advantage in producing a good if it can produce that good at lower marginal cost, lesser manpower, lesser time and lesser cost without compromising the quality.
How is comparative advantage related to opportunity cost?
Comparative advantage is related to the opportunity cost (the cost of next best alternative forgone). A country has a comparative advantage over the other country when it faces a lower opportunity cost in producing a particular product than the other country.
Who was the founder of absolute and comparative advantage?
Adam Smith helped to originate the concepts of absolute and comparative advantage in his book, An Inquiry into the Nature and Causes of the Wealth of Nations. Smith argued that countries should specialize in the goods they can produce most efficiently and trade for those goods they can’t produce as well. 1
