Absolute advantage and comparative advantages

example of comparative advantage

Her opportunity cost of producing a cup is three plates: her opportunity cost. We are now ready to investigate comparative advantage. Political benefits: Countries can leverage trade to forge closer cultural and political bonds.

Absolute advantage vs comparative advantage

Benefits of Specialization Specialization leads to greater economic efficiency and consumer benefits. Generally, nations can consume more by specializing in a good and trading it for other goods. So she would be willing to trade anything less than three plates for a cup, assuming that she wants it. Provided by: Wiktionary. What are the opportunity costs and gains from trade? Clearly, to gain from trade it needs to be able to gain more than a half barrel of oil for its bushel of corn—or why trade at all? This analysis takes money out of the picture entirely and considers opportunity costs as the tradeoffs between producing one good versus the other. In other words, there is an increasing opportunity cost associated with increasing specialisation.

If we think about plates, who has a lower opportunity cost for producing a plate? Benefits of specialization include greater economic efficiency, consumer benefits, and opportunities for growth for competitive sectors. So now he'll end up at this scenario over here, which was beyond, which was unattainable, when he was working by himself, when he didn't specialize and get gains from trade.

Absolute advantage example

Thus in this example with no trade costs both countries benefit from specializing and then trading. This will make the PPF for each country non-linear and bowed outwards. An economy that is operating on the PPF is productively efficient, meaning that it would be impossible to produce more of one good without decreasing the production of the other good. Comparative advantage helps in more effective decision making for countries for resource allocation and production hence more beneficial for economies in comparison to absolute advantage. In the previous example, the Chinese worker had an absolute advantage in producing rice because he could produce twice as much per hour as the worker in the United States. It follows that Bob will have a comparative advantage in the production of mustard. But let's think about comparative advantage.

In addition to comparative advantage, other reasons for trade include: Differences in factor endowments: Countries have different amounts of land, labor, and capital.

It's helpful to notice that, by definition, the opportunity cost of one good is the reciprocal of the opportunity cost of the other good. So she traded twenty plates, so she's down ten plates but she got ten cups, so that put her right over here. Strategic vulnerability: Relying on another country for vital resources makes a country dependent on that country.

Comparative Advantage: Chiplandia has a comparative advantage in producing computer chips, while Entertainia has a comparative advantage in producing CD players.

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Introduction to International Trade