Answer to Question #92264 in Macroeconomics for ROTENDA

Question

Use examples to explain the difference between absolute advantage and comparative (or relative) advantage in international trade. (you can draw a table or you can explain)

Answer 1

absolute advantage - The capability to produce more of a given product using less of a given resource than a competing entity.

comparative advantage - The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.

The same amount of resources in both countries allows them to produce either product X or product Y. The table shows that country B is absolutely more efficient than country A, since it can produce a greater quantity of both product X and product Y. However, comparative advantage, not absolute advantage, determines whether trade is profitable or not.

Country B has a comparative advantage in the production of product X, since it is able to produce it with lower costs of production factors than country A, because the alternative costs of producing an additional item X are only 0,66 Y in country B, whereas in country A they equal to 1Y.

But country A has a comparative advantage in the production of commodity Y, since it is capable of producing it with lower relative costs of production factors than country B: the alternative costs of producing an additional unit of commodity Y are only 1X, whereas in country B they are 1,5 X .