Question

Please explain the difference between “absolute advantage” and “comparative advantage” and illustrate your explanation by means of a “two-countries/two-products model” involving: country 1 (C1); country 2 (C2); product 1 (P1); and product 2 (P2).

Answer 1

Absolute advantage means items/products that are produced with very fewer resources such as, time, labor, and stock from a particular country or company.

For example, C1 (Australia) produces P1 (Coal)

C2 (Saudi Arabia) produces P2 (Oil)

Country	P1 (Hours)	P2 (Hours )
C1	1	6
C2	3	1

Australia has an absolute advantage of producing Coal cause it took 1 hour as compared to 6 hours of oil; and Saudi Arabia has an absolute advantage of producing Oil cause it took 1 hour as compared to 3 hours of coal.

Comparative advantage means items/products that are produced with lower marginal or opportunity costs as compared to others. Opportunity cost is the profit lost when one product is chosen over another.

For example, C1 (Australia) produces P1 (Coal)

C2 (Saudi Arabia) produces P2 (Oil)

Country	P1 (Opportunity Cost)	P2 (Opportunity Cost)
C1	1/4	6
C2	3	1/2

Since Australia has the least profit loss of coal, it has a comparative advantage over oil. Whereas Saudi Arabia has the least profit loss of oil, it has a comparative advantage over coal.