Question

What does absolute advantage mean? How do you calculate absolute advantage? What does comparative advantage mean? How do you calculate comparative advantage? Does a country with the absolute advantage in the production of a good always have the comparative advantage producing that good? Explain your reasoning.

Answer 1

Absolute advantage means that country X can produce more of all the goods with better productivity and with low amount of resources used than country Y

Comparative advantage measures the productivity in terms of opportunity costs.It means that a country Y which does not have absolute advantage in producing any good will still have comparative advantage in one good as it would be able to produce that good at low opportunity cost than country X.

To measure the absolute advantage consider the following example:

Suppose country X produces 5 apples and 10 oranges and country Y produces 4 apples and 6 oranges

In this case Country X has absolute advantage in producing both the goods.

To measure the comparative advantage:

Country X has to give up 10/5 =2 orange to produce 1 apple and 5/10 = 0.5 apple to produce 1 orange

Whereas Country Y has to give up 6/4=1.5 orange to produce 1 apple and 4/6 = 0.6 apple to produce 1 orange.

In this case,we can see that Country X has comparative advantage in producing oranges and country Y has comparative advantage in producing Apples as their opportunity cost in terms of another good is lower compared to other one.

So,Country X doesn't have comparative advantage in producing one unit of Apple even though it has absolute advantage in it.