Economics All Around The World: International Trade

Absolute and Comparative Advantage

Absolute Advantage

Absolute advantage is the ability of one country or party to produce a better product compared to the competitors by using the same amount of resources. Focuses on the advantage of cost.

Example,

UK can produce 100 computers in an hour with 20 employees.

Germany can produce 50 computers in an hour with 20 employees. Both parties are paid a fair amount. It can be obviously seen that UK has an absolute advantage over Germany because it can assemble more computers in the same hour period with the same amount of workers.

Comparative Advantage

Comparative advantage occurs when a country can produce the same product as the other with a lower opportunity cost of production. But even if one country is better than the other, both countries and parties will still benefit by trading with each other, as long as they have difference efficiencies.

For example,

A worker in China can produce 2 pounds of rice or 3 papaya's in an hour. Opportunity cost of 2 pounds of rice is 3 papaya's vice versa. 1 papaya is 2/3 pound of rice. Opportunity cost for 1 pound of rice is 3/2 of papaya's.

A worker in Ireland can produce 1 pound of rice or 2 papaya's in an hour. Opportunity cost for 1 papaya is half pound of rice.

After comparing, opportunity cost for a pound of rice is 3/2 papaya's in China and 2 papaya's in Ireland. Hence, China has a comparative advantage in producing rice.

On the other hand, the opportunity cost of a papaya is 2/3 a pound of rice in China and 1/2 pounds of rice in Ireland. It shows that Ireland has an comparative advantage in producing papaya's.