Answer to Question #91789 in Macroeconomics for mulweli

Question

use examples to explain the difference between absolute advantage and comparative advantage in international trade

Answer 1

The terms associated with absolute advantage is lower marginal cost. And the terms associated with comparative advantage is lower marginal and opportunity cost both.

Suppose any countries have cheapest land rate. Then in that country, agriculture production takes the benefits of absolute advantage and sell the crop to other countries that have not absolute advantage. Here the cheapest land rate means lower marginal cost.

Any product or services that can produce more efficiently by allocation of resources efficiently takes the advantages of absolute. More efficiently means cost incurred in production of goods is less. If cheapest material and man resources available in any country then naturally the cost incurred in production of good is less and then takes the benefits of absolute advantage.

China takes the absolute advantage of electronic gadgets to sell others country.

Suppose two countries like A and B produce same goods say electronic gadgets by incurring same amount of manpower, and suppose country A produces 6 items but countries B produces 3 items of good then we can says country A can takes absolute advantage of items.

Now comparative advantage, it involves both factors time, output, specialisation.

It is not necessary that any country have both benefits of absolute and comparative advantages of goods and services. Suppose Country A produces 6 foods, and 3 clothes and country B produces 1foods and 2 clothes in the same period of time then naturally country A has absolute advantages of both foods and clothes but not necessarily of comparative advantages. The comparative advantage determination also involved the factor of low opportunity cost.

The opportunity cost of producing 1 unit of clothing is 2 units of food in Country A, but only 0.5 units of food in Country B. Then country B takes the advantages of clothing.

Now both can gets benefited from trading with each other