Question

Please come up with an example of a situation where one person has an absolute advantage in the production of some good or service. Once you have defined the absolute advantage, describe a situation where a person has a comparative advantage.

Please remember to discuss the difference between the two situations and why each is an example of each kind of advantage.

Answer 1

Above is a situation that depicts PPF curve of John and Mark. Here, it is observed that John is producing more apples or more cheese than that of Mark. It shows higher efficiency level of John in comparison to that of Mark. So, John holds absolute advantage in producing both of Apple and Cheese over Mark.

In the same situation,

For John, opportunity cost of producing Apple = 40/80 = .5 wheels of cheese

For Mark, opportunity cost of producing Apple = 15/60 = .25 wheels of Cheese

Since opportunity cost of producing apple is relatively lower for Mark, then Mark has comparative advantage in producing Apples and John has comparative advantage in producing Cheese due to the relatively lower opportunity cost.

In both the situation, the difference is the basis of creation of advantage. The absolute advantage relies on efficiency of work, but comparative advantage relies on opportunity cost of doing work. It is the reason that a person or country can have absolute advantage in both the goods, but it will hold comparative advantage in producing only one good. It makes the basis of specialization and trade.