Unit 7
Absolute and Comparative Advantage
Absolute Advantage
A person or a nation has a comparative advantage when it can produce the product at a lower domestic opportunity cost than can a trading partner.
Examples of output problems
1. Words per minute.
2. Miles per gallons.
3. Tons per acre
4. Apples per tree
5. Televisions produced per hour
Examples of input problems
1. Number of hours to do a job.
2. Number of acres to feed a horse
3. Number of gallons of paint to paint a house.
Specialization and trade
- Individual- exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources).
- National- exists when a country can produce more a good/service than another country can in the same time period.
A person or a nation has a comparative advantage when it can produce the product at a lower domestic opportunity cost than can a trading partner.
Examples of output problems
1. Words per minute.
2. Miles per gallons.
3. Tons per acre
4. Apples per tree
5. Televisions produced per hour
Examples of input problems
1. Number of hours to do a job.
2. Number of acres to feed a horse
3. Number of gallons of paint to paint a house.
Specialization and trade
- Gains from trade are based on comparative advantage, not absolute advantage.
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