Differentiating between Comparative and Absolute Advantage

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  • 0:02 International Trade
  • 0:34 Absolute Advantage
  • 1:38 Comparative Advantage
  • 2:36 Absolute and…
  • 3:09 Lesson Summary
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Lesson Transcript
Instructor
Jennifer Lombardo
Expert Contributor
Joseph Shinn

Joe has a PhD in Economics from Temple University and has been teaching college-level courses for 10 years.

International trade is embraced by countries due to many benefits. In this lesson, we will discuss the differences between comparative and absolute advantage and the importance of specializing in production.

International Trade

Most consumers don't really think about why their country participates in international trade, or the exchange of goods and services between countries. For example, how often do you stop and think about where your coffee, mangoes, bananas, automobile, clothing, toys and technology products come from?

Does trading help a country's economic structure? In this lesson, you will learn how countries benefit from trade by understanding the differences between comparative and absolute advantage.

Absolute Advantage

When a country is more productive and efficient at making a product than any other country, it is said to have an absolute advantage. In other words, a country with an absolute advantage has the ability to produce more of a product using less of the resource than another country. Let's take a look at a hypothetical example to illustrate the concept. China has an absolute advantage regarding the production of rice. This means that China can produce rice more efficiently and with a lower marginal cost, which is the cost of producing one more of the product.

The lower marginal cost occurs due to a number of different advantages such as cheaper labor or materials. When a country has an absolute advantage over another, they specialize, or devote all of their resources into a few select products. For example, the United States is known to specialize in technology products, and other countries import these products due to the absolute advantage that exists for the U.S.

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Additional Activities

Additional Questions:

For each of the following statements, determine whether "comparative advantage" or "absolute advantage" is the best fit when filling in the blank.

An answer key is provided, but no peeking.

  1. Whoever can produce something at a lower opportunity cost is said to have a(n) _____ over another person.
  2. One person has a(n) _____ over another person if they can produce more of a good or service in a given time period.
  3. When determining what parties should produce what when specializing and trading, _____ should be considered.
  4. Person A needs to give up one car for every one truck produced. Person B, on the other hand, needs to give up two cars for every one truck produced. Therefore, Person A has a(n) _____ over person B in the production of trucks.
  5. Person A can produce 20 chairs in an hour while person B can produce ten chairs in an hour. Therefore, Person A has a(n) _____ over person B in the production of trucks.
  6. One person can have a(n) _____ over another person in everything that they produce.
  7. One person will hire another person to produce goods and services for him/her, even if that person has a(n) _____ in everything that they can produce.

Answers:

  1. comparative advantage
  2. absolute advantage
  3. comparative advantage
  4. comparative advantage
  5. absolute advantage
  6. absolute advantage
  7. absolute advantage

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