Question

Do you understand the difference between absolute and relative advantage and how it relates to the PPF Curve (IE where each are determined?)

Answer 1

( IE - International Economics )

Difference between Absolute and Relative (Comparative) Advantage:

Absolute advantage is the ability of the country to produce a good or services at a lower cost per unit than the another country that produces same good or services. In other words, when a country uses lower input cost to produce a good or service than other country it means the country has the absolute advantage in producing that good or service whereas the comparative advantage is based on the opportunity cost. When a country's opportunity cost of producing a good or services is lower than the other country's opportunity cost of producing same good or services it means the country has an comparative advantage.In other words, it refers to the ability to produce goods and services at lower opportuity cost.

lets take an example

	Country A	Country B
Cars	30	35
Trucks	6	21

In this example country B has the absolute advantage in producing both cars and trucks it is so because using same resources Country A can produce 30 units of cars and 6 units of trucks whereas country B can produce 35 units of cars and 21 units of trucks.

But country B has a comparative advantage in trucks because it is relatively better at producing them.

As opportunity cost of producing truck for country B is 35/21 cars = 1.66

whereas the opportunity cost of producing trucks in country A is 30/6 = 5

so country B has lower opportunity cost of producing truck

also opportunity cost of producing cars in country B is 21/35 = 0.6

and opportunity cost of producing cars in country A is 6/30 = 0.2

so country A has comparative advantage in producing cars and country B has comaparative advantage in producing trucks.

To find how these relate to PPF curve we will first draw the ppf curve