Comparative and Absolute Advantage

Absolute Advantage means that a country can produce more product with the same amount of inputs.

In the illustration at the right you can see that with one hour of time Abba has the absolute advantage in both fish and figs because it can produce more of both products in one hour than Zarin can produce.

1. How many fish can Abba produce in one hour?
2. How many fish can Zarin produce in one hour?
3. How many figs can Abba produce in one hour?
4. How many figs can Zarin produce in one hour?
5. Who has the comparative advantage in fish? Explain.
6. Who has the comparative advantage in figs? Explain.
7. Should the two nations trade or not? Explain.

Before you try to answer these questions in the comments section of this blog, watch the Khan Academy video below. It does an excellent job of explaining how it may still make sense to trade even if one country has the absolute advantage in both products. (You may have to watch it more than once to be able to apply the concepts in the video to the Abba and Zarin situation.)

Comparative and Absolute Advantage video

Comparative Advantage

We have learned that trading between nations is beneficial to both countries if the countries have a comparative advantage in different products. The "comparative advantage" means that one country has a lower opportunity cost for that product when compared to the opportunity cost of its trading partner. (Recall our Fish and Coconut example.)

This video from Khan Academy further explores this concept by using production possibility frontiers to illustrate comparative advantage. After watching the video, please post a comment summarizing the main points presented in the video and your opinion regarding whether or not the video was helpful in clarifying your understanding of this topic.

Comparative Advantage Video