What is the difference between comparative advantage and absolute advantage in economics?
What is the difference between comparative advantage and absolute advantage in economics?
Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better. Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production diversification.
Is trade based on absolute advantage or comparative?
Trade benefits both agents when each specializes in what they have a comparative advantage in producing and trading with another agent who has a comparative advantage in something else. The gains from trade occur based on comparative advantage, not absolute advantage.
What is absolute and comparative advantage in international trade?
Key Terms. Absolute advantage: The capability to produce more of a given product using less of a given resource than a competing entity. comparative advantage: The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another.
How is comparative advantage defined?
Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
Which country or countries have an absolute advantage and comparative advantage in shoes?
The United States has an absolute advantage in productivity with regard to both shoes and refrigerators; that is, it takes fewer workers in the United States than in Mexico to produce both a given number of shoes and a given number of refrigerators.
What best defines comparative advantage?
What are some examples of absolute advantage?
Absolute advantage may also arise from the level of available capital, such as factories or infrastructure. For example, India has an absolute advantage in operating call centers compared to the Philippines because of its low cost of labor and abundant labor force.
What is an example of absolute advantage in economics?
Absolute Advantage. The ability for an economic actor to produce a good or service using fewer resources. For example, if an individual produces 100 bricks using 100 units of labor and a second individual produces 200 bricks using the same amount of labor, the second individual has an absolute advantage in the production of bricks.
What is absolute advantage opportunity cost?
A country has an absolute advantage in producing a good if it can either produce a product with fewer resources or with a lower cost of resources . The opportunity cost of a product or service is the difference in value between the value of what is produced with a given set of resources minus the maximum value that can be produced with those resources.
What does comparative advantage mean?
Definition of comparative advantage. Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare.