Absolute Advantage

1
Absolute Advantage

• When it is possible for one country to produce
  more goods and services than other countries with
  the same level of inputs (lower cost/unit)
• Eg. Zambia has large reserves of copper ore ? is
  better suited to produce copper for export
• This is not main reason for international trade

2
Comparative Advantage

• When a country can produce a good or service at a
  lower opportunity cost than another country
• Even if absolute disadvantage exists for a
  country, it can still benefit its neighbours with
  trade by focusing on the good with a lower
  opportunity cost than theirs (they give up less
  than the other country)

3
Comparative Advantage PPF
Corn
9
Because the PPF gradients are different, these
two countries have different opportunity costs
between Corn and Wheat ?they will
trade! Opportunity cost sacrifice/gain
Country X
6
Country Y
Wheat
5
6
The opp. cost of Country Y producing wheat is 6/5
(sacrifice over gain) The opp. cost of Country X
producing wheat is 9/6 So, Country X should do
the wheat (lower opportunity cost)
4
Comparative Advantage PPF
Corn
Because the PPF gradients are the same, these two
countries have the same opportunity costs between
Corn and Wheat ?they will not trade! Country X
MAY have an absolute advantage, or it may just
have more resources.
6
Country X
5
Country Y
Wheat
5
6
5
Comparative Advantage Opportunity Cost
Wheat Corn
Country A 5 10
Country B 4 2
Opportunity Costs For country A to gain 1 unit
of wheat, they would give up 2 units of corn. For
country B to gain 1 unit of wheat, they would
give up ½ unit of corn. For country A to gain 1
unit of corn, they would give up ½ unit of
wheat For country B to gain 1 unit of corn, they
would give up 2 units of wheat ?Country A should
produce corn and country B should produce wheat
6
Comparative Advantage Opportunity Cost
Textiles Cars
China 15 5
Japan 1 4
Opp. cost in China of 1 unit of textile is 1/3
car Opp. cost in Japan of 1 unit of textile is 4
cars Opp. cost in China of 1 car is 3 units of
textile Opp. cost in Japan of 1 car is 1/4 unit
of textiles ?China should produce textiles
Japan cars.