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Economics / Textbooks / BoundlessEconomics / InternationalTrade / IntroductiontoInternationalTrade

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AbsoluteAdvantageVersusComparativeAdvantage

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Absoluteadvantagereferstodifferencesinproductivityofnations,while
comparativeadvantagereferstodifferencesinopportunitycosts.
LEARNINGOBJECTIVE [edit]
Differentiatebetweenabsoluteadvantageandcomparativeadvantage

KEYPOINTS [edit]
Theproducerthatrequiresasmallerquantityinputstoproduceagoodissaidtohaveanabsolute
advantageinproducingthatgood.
Comparativeadvantagereferstotheabilityofapartytoproduceaparticulargoodorserviceatalower
opportunitycostthananother.
Theexistenceofacomparativeadvantageallowsbothpartiestobenefitfromtrading,becauseeach
partywillreceiveagoodatapricethatislowerthanitsopportunitycostofproducingthatgood.

TERMS [edit]

Absoluteadvantage
Thecapabilitytoproducemoreofagivenproductusinglessofagivenresourcethanacompetingentity.

comparativeadvantage
Theabilityofapartytoproduceaparticulargoodorserviceatalowermarginalandopportunitycostover
another.

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FULLTEXT [edit]

Absoluteadvantagecomparestheproductivityof
differentproducersoreconomies.Theproducer

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thatrequiresasmallerquantityinputstoproducea
goodissaidtohaveanabsoluteadvantageinproducingthatgood.
TheaccompanyingfigureshowstheamountofoutputCountryAandCountryBcanproduceinagivenperiod
oftime.CountryAuseslesstimethanCountryBtomakeeitherfoodorclothing.CountryAmakes6unitsof
foodwhileCountryBmakesoneunit,andCountryAmakesthreeunitsofclothingwhileCountryBmakestwo.
Inotherwords,CountryAhasanabsoluteadvantageinmakingbothfoodandclothing.

AbsoluteAdvantage
CountryAhasanabsoluteadvantageinmakingbothfoodandclothing,butacomparativeadvantageonly
infood.

Comparativeadvantagereferstotheabilityofapartytoproduceaparticulargoodorserviceatalower
opportunitycostthananother.Evenifonecountryhasanabsoluteadvantageinproducingallgoods,different
countriescouldstillhavedifferentcomparativeadvantages.Ifonecountryhasacomparativeadvantageover
another,bothpartiescanbenefitfromtradingbecauseeachpartywillreceiveagoodatapricethatislower
thanitsownopportunitycostofproducingthatgood.Comparativeadvantagedrivescountriestospecializein
theproductionofthegoodsforwhichtheyhavethelowestopportunitycost,whichleadstoincreased
productivity.
Forexample,consideragainCountryAandCountryBin.Theopportunitycostofproducing1unitofclothing
is2unitsoffoodinCountryA,butonly0.5unitsoffoodinCountryB.Sincetheopportunitycostof
producingclothingislowerinCountryBthaninCountryA,CountryBhasacomparativeadvantagein
clothing.

Thus,eventhoughCountryAhasanabsoluteadvantageinbothfoodandclothes,itwillspecializeinfood
whileCountryBspecializesclothing.Thecountrieswillthentrade,andeachwillgain.
Absoluteadvantageisimportant,butcomparativeadvantageiswhatdetermineswhatacountrywillspecialize
in.
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Whatisthedifferencebetweenabsoluteadvantage?

KEYTERMREFERENCE

OpportunityCosts

Appearsintheserelatedconcepts:BreakEvenAnalysis,Individuals

FaceOpportunityCosts,andPricesasInformation

Opportunitycost

Appearsintheserelatedconcepts:AdvantagesofthePaybackMethod,

DefiningthePaybackMethod,andDefiningComparativeAdvantage

cost

Appearsintheserelatedconcepts:ExplainingtheStakesandtheConsequences,

EconomicCosts,andIntroductiontoMarketsforInputsandDistributionofIncome

input

Appearsintheserelatedconcepts:DefiningProductivity,AStudyofProcess,and

ChangesinTechnologyOverTime

output

Appearsintheserelatedconcepts:FunctionsandTheirNotation,Definingthe

ProductionFunction,andIntroducingAggregateSupply

price

Appearsintheserelatedconcepts:BreakEvenAnalysis,TermsUsedtoDescribePrice,

andDefiningaMarketSystem

productivity

Appearsintheserelatedconcepts:BenefitsofInnovation,Assessingan

Organization'sTechnologicalNeeds,andTheImportanceofMotivation

trade

Appearsintheserelatedconcepts:Tradevs.ConsumerPromotions,Exports:The

EconomicImpactsofSellingGoodstoOtherCountries,andImports:TheEconomicsImpactsofBuyingGoods
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SOURCES
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Boundlessvetsandcurateshighquality,openlylicensedcontentfromaroundtheInternet.This
particularresourceusedthefollowingsources: ImanAdministrator
"Boundless."
http://www.boundless.com/
BoundlessLearningCCBYSA3.0.
"Boundless."
http://www.boundless.com//business/definition/comparativeadvantage
BoundlessLearningCCBYSA3.0.
"Absoluteadvantage."
http://en.wiktionary.org/wiki/Absolute+advantage
WiktionaryCCBYSA3.0.
"mrskiapecon2008Chapter3InterdependenceandtheGainsfromTrade."
http://mrskiapecon2008.wikispaces.com/Chapter+3++Interdependence+and+the+Gains+from+Trade
WikispacesCCBYSA.
Wikispaces.
http://mallorykearney.wikispaces.com/file/view/MacroCh3.pptx?
CCBYSA.
"Comparativeadvantage."
https://en.wikipedia.org/wiki/Comparative_advantage
WikipediaCCBYSA3.0.
"Absoluteadvantage."
https://commons.wikimedia.org/wiki/File:Absolute_advantage.jpg
WikimediaCCBYSA.

CITETHISSOURCE

Source:Boundless.AbsoluteAdvantageVersusComparativeAdvantage.BoundlessEconomics.Boundless,26May.
2016.Retrieved19Jul.2016fromhttps://www.boundless.com/economics/textbooks/boundlesseconomics
textbook/internationaltrade31/introductiontointernationaltrade124/absoluteadvantageversuscomparative
advantage49312589/

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