Comparative Advantage vs. Absolute Advantage, Exercises of Macroeconomics

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Comparative Advantage vs.

Absolute Advantage

Absolute Advantage

• When an individual or nation specializes in the production of a particular good or service and trades for all other goods or services, the total output and welfare of society is increased.

Absolute Advantage

• For example:
• If the United States can produce 13 million cell phones using 1, workers and Korea can produce only 12 million cell phones using 1,000 workers, then the United States has an absolute advantage in the production of cell phones.
• If the United States can grow 39 million apples using 1,000 workers and Korea can grow only 24 million apples using the same amount of labor, then the United States has an absolute advantage in apples.

Absolute Advantage in a Production Possibilities Table The United States has an absolute advantage in both goods since it can produce more apples and more cell phones using 1,000 workers. Country/Good Cell Phones Produced by 1,000 Workers (millions) Apples Grown by 1, Workers (millions) United States 13 39 Korea 12 24

Comparative Advantage

• To determine which country has a comparative advantage in apples, you must calculate the opportunity cost of apples in the United States and in Korea:
• To grow 39 million apples, the United States must give up 13 million cell phones. Therefore, each apple “costs” the United States 13/39 = .33 cell phones. To grow 24 million apples in Korea, 12 million cell phones must be given up. Each apple “costs” Korea 12/24 = 0.5 cell phones.

Comparative Advantage

• The opportunity cost of an apple in the United States is only 0.33 cell phones, while the opportunity cost of an apple in Korea is 0.5 cell phones.
• The United States has a comparative advantage in the production of apples, because it costs the United States fewer cell phones in order to make an apple than it costs Korea.

Comparative Advantage

• Note that a country could never have a comparative advantage in

production of both goods, because the opportunity cost of one

good is the reciprocal of the other good.

• Specialization and trade should be based on comparative

advantage, not absolute advantage.

Comparative Advantage vs. Absolute

Advantage

• Countries should specialize in the production of the good or goods for which they have a comparative advantage over other countries, and trade for other goods.
• Such trading allows each country to reduce its opportunity cost of the good it imports.
• In our example, Korea should specialize in cell phones, and the United States in apples, and the two countries should trade with one another.