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Absolute and Comparative Advantage

Economics discussion of absolute v comparative advantage

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23 views4 pages

Absolute and Comparative Advantage

Economics discussion of absolute v comparative advantage

Uploaded by

mark.stevo10
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Absolute Advantage

Due to countries quality and quantity endowments between countries-this


determines the types of good produced, the quantity produced and the
productive efficiency. —These differences create opportunities to specialise
and trade due to absolute and comparative advantage.

Absolute advantage- when a country experiences lower costs producing a good


than another country- i.e. produces more goods using the same resources

Reciprocal absolute advantage is where each


country has an absolute advantage in a single
product- incentive to expand production via
specialising and trading- then welfare rises as
able to increase consumption.

To be a reciprocal absolute advantage- each country


must have an absolute advantage in one good, shown
on graph as two lines intersect proving there, I is a
reciprocal absolute advantage

-Only is a reciprocal absolute advantage if two lines


intersect at a point

Comparative advantage

-When a country experiences a lower opportunity cost producing a good than


another country.
France has a lower opportunity cost in wine so decides to specialise in wine

Opportunity cost of wine (M/W) works out


how much milk you have to give up to
produce one extra unit of wine- opportunity
cost of wine in Poland to produce 1 extra
unit of wine in Poland you have to give up 3
milk bottles, where in France to produce one
extra unit of wine you have to give up only
1.33 milk bottles so France should produce wine as it has comparative
advantage-lowest opportunity cost in producing wine.

Opportunity cost of milk (W/M) works out how much wine you have to give up
to produce one extra unit of milk, opportunity cost of milk in Poland you have
to give up only 0.33 bottles of wine to produce one extra unit of milk where in
France you have to give up 0.75 bottles of wine to produce one extra unit of
milk so Poland should produce milk as it has the comparative advantage in
producing milk as it has the lowest opportunity cost.

This incentivises trade- as countries now specialise and focus on the goods,
they hold comparative advantage in and trade their surplus to the other
country.

You can see how both countries


have specialised in the goods
they hold comparative
advantage in.

However, the countries may not


specialise fully as one less milk
bottle is being produced from
pre to post specialisation- may
be incentive to specialise a bit but not totally- to manage production.

Overall, there has been an expansion in production.

The graphs don’t intersect as there is no


reciprocal absolute advantage

France holds absolute advantage in both goods;


however, Poland has a comparative advantage
in milk and France has a comparative advantage
in wine so they can trade.
No opportunity cost differences in this example- so no need for the countries
to specialise or trade.

-From this you can learn how crossed PPF curves=incentive to trade
-Unevenly parallel PPFs between countries means incentive to trade as this
indicated comparative advantage.
-But if PPF curves are parallel indicates no incentive to trade as there is no
comparative advantage differential between the countries
Thing to know
-Absolute advantage=lower costs
Comparative advantage=opportunity costs

Comparative advantage must have opportunity costs in it whereas Absolute


advantage should not contain opportunity costs.

Theoretical limitations with these Ab and Comp advantages theory-good


critical analysis:

-There is imperfect information for countries, countries won’t completely


understand their production capabilities

-It doesn’t factor in economies of scale

-It doesn’t factor in transport costs between countries

-it doesn’t factor in Branding- this theory was developed in days of


homogenous goods, not when branding had a big effect on economies

-It ignores trade barriers- this can cause complications for countries when they
execute trade between one another.

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