Answer to Question #186024 in Microeconomics for Sakaham

Question

) Compare the absolute Advantage theory of trade with the Comparative advantage theory of 

trade. A country can have a comparative advantage in producing a good even if it is 

absolutely less efficient at producing that good. Do you agree? Explain using an example. 

Answer 1

A country has an absolute advantage if it has the ability to produce a good using fewer inputs than another producer while a country has a comparative advantage if it can produce a good at lower opportunity cost than another producer.

For example, let's say Saudi Arabia and United states each have 100 worker hours

using all its resources, Using all its resources, the United States can produce 50 barrels of oil or 100 bushels of corn. So the opportunity cost of one barrel of oil is two bushels of corn. the slope is 1/2. Saudi Arabia can produce 100 barrels of oil or 25 bushels of corn. the opportunity cost of producing one barrel of oil is the loss of 1/4 of a bushel of corn.

in terms of corn, Saudi Arabia gives up the least to produce a barrel of oil therefore it has comparative advantage in oil production

In terms of corn, The United States gives up the least bushel of corn so it has a comparative advantage in corn production.