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Comparative Vs Absolute advantage? watch

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    Really struggling to get this concept in my head. I understand that an absolute advantage means that the country can produce a greater output with the same quantity of resources as another country, whereas a comparative advantage means that if a country specialises in producing a good were they have a lower opportunity cost they will see an increase in economic welfare.

    However, whenever it comes to showing the specialisation/comparative advantage using a numerical example I just freeze and can't understand it! I can show absolute advantage fine with a quick comparison between man hours required to produce the good. Anyone have a simple to remember example, or a way to explain it which may help me understand? Thanks!
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    https://courses.lumenlearning.com/bo...ational-trade/

    This link sums it up pretty well with examples!

    Absolute advantage refers to differences in productivity of nations, while comparative advantage refers to differences in opportunity costs.
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    Let me give you an example

    Suppose they are 2 countries A and B producing cars and computers

    Within a given time period
    Car : A produces 100 while B produces 200

    Com : A produces 1000 while B produces 1500

    For absolute advantage clearly B has it for both products due to higher total productivity.

    For comparative advantage, you will have to compute the opportunity cost (OC) of one product in relative to another.

    To produce cars, the OC of A is (1000/100) = 10 computers while the OC of B is (1500/200) = 7.5 computers. That means it costs less for B to produce cars so car is comparative advantage for B.

    On the flip side, to produce computers, the OC of A is (100/100) = 0.1 cars while the OC of B is (200/1500) = 0.13 cars. That means it costs less for A to produce computers and computer is comparative advantage for A.

    You can see that although B outperforms A in both sectors, each has its own comparative advantage calculated on the basis of opportunity cost and this leads to the concept of [gain from trade] when country specializes in what they’re more efficient and trade at the price between the opportunity cost of 2 countries.

    I hope this is helpful and please correct me if I’m mistaken ^_^
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    (Original post by Nathan9087)
    Let me give you an example

    Suppose they are 2 countries A and B producing cars and computers

    Within a given time period
    Car : A produces 100 while B produces 200

    Com : A produces 1000 while B produces 1500

    For absolute advantage clearly B has it for both products due to higher total productivity.

    For comparative advantage, you will have to compute the opportunity cost (OC) of one product in relative to another.

    To produce cars, the OC of A is (1000/100) = 10 computers while the OC of B is (1500/200) = 7.5 computers. That means it costs less for B to produce cars so car is comparative advantage for B.

    On the flip side, to produce computers, the OC of A is (100/100) = 0.1 cars while the OC of B is (200/1500) = 0.13 cars. That means it costs less for A to produce computers and computer is comparative advantage for A.

    You can see that although B outperforms A in both sectors, each has its own comparative advantage calculated on the basis of opportunity cost and this leads to the concept of [gain from trade] when country specializes in what they’re more efficient and trade at the price between the opportunity cost of 2 countries.

    I hope this is helpful and please correct me if I’m mistaken ^_^
    That’s exactly what I needed Nathan, thank you. Much clearer than the example in my notes!
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    (Original post by AlexJon)
    That’s exactly what I needed Nathan, thank you. Much clearer than the example in my notes!
    Happy to help
 
 
 
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