Joined: 24 Nov 2008
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Posted: 16 Nov 2009 at 13:05 | IP Logged
Hello,
Can someone please explain the difference between absolute advantage and comparative advantage as it pertains to international trade? My books don't do a good job of explaining it.
Joined: 11 Oct 2009
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Posted: 16 Nov 2009 at 15:24 | IP Logged
um... my understanding is absolute advantage means lower actual cost of production of the same product than other country, while comparative advantage means lower opportunity cost to produce the same product than other country.
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Joined: 07 Dec 2008 Location: United States
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Posted: 16 Nov 2009 at 16:25 | IP Logged
Yep, that is it.
If I can produce either 2 widgets or 5 wombles with the resources I have for $1/each and 2$/each respectively, while Stewie can produce 2 widgets or 3 wombles for $2/each and $3/each respectively:
I can produce widgets (and wombles) cheaper than Stewie and so I have absolute advantage regarding both products. However, for every widget that Stewie produces, he gives up the ability to produce 1.5 wombles. For every widget that I produce (cheaper than Stewie), I am giving up the ability to produce 2.5 wombles, so Stewie possesses comparative advantage since his production of widgets results in less opportunity cost as regards lost womble production than mine.
So I have CA and AA for womble production and I have AA for widget production, but Stewie has CA for widget production.
If we both focus on where we have CA (not AA), I will produce wombles and Stewie will produce widgets and all of society will be blessed with the greatest number of widgets and wombles in total.
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Topic: Advantage
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