Economics / Unit 11: International Trade and the Global Economy
11.1 Absolute and Comparative Advantage
Notes
- Absolute advantage: the ability to produce more of a good than another producer with the same resources.
- Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer. Trade is based on comparative advantage, not absolute advantage.
- The British economist David Ricardo explained comparative advantage in 1817.
- Worked example: in one day, a worker in Country A can make 12 shirts or 4 computers. A worker in Country B can make 6 shirts or 3 computers.
| Shirts per day | Computers per day | Cost of 1 computer | Cost of 1 shirt | |
|---|---|---|---|---|
| Country A | 12 | 4 | 3 shirts | $\displaystyle \frac{1}{3}$ computer |
| Country B | 6 | 3 | 2 shirts | $\displaystyle \frac{1}{2}$ computer |
- A has the absolute advantage in both goods. But B gives up fewer shirts per computer (2 versus 3), so B has the comparative advantage in computers. A gives up less per shirt ($\displaystyle \frac{1}{3}$ versus $\displaystyle \frac{1}{2}$ computer), so A has the comparative advantage in shirts.
- A producer cannot have a comparative advantage in both goods.
Practice
In one hour, Lena can write 6 essays or bake 12 cakes. What is her opportunity cost of writing one essay?
$\displaystyle \frac{12}{6} = 2$ cakes given up per essay.
In a day, a worker in Country X makes 10 wheels of cheese or 5 barrels of wine. A worker in Country Y makes 4 wheels of cheese or 4 barrels of wine. Which statement is correct?
X: 1 wine costs 2 cheese; Y: 1 wine costs 1 cheese. Y makes wine more cheaply; X makes cheese more cheaply ($\displaystyle \frac{1}{2}$ wine versus 1 wine).
Comparative advantage is based on:
Absolute advantage is about producing more; comparative advantage is about lower opportunity cost.
Ready for more? Take the Unit 11 test.