1.

Definition of absolute and comparative advantages

- Absolute advantage is the ability of a country to produce a
good using fewer re-sources than another country.
- Comparative advantage is the ability of a country to produce a
good at a lower opportunity cost than another
country.Comparative advantage refers to the relative opportunity
costs between countries of producing the same goods. World
output and consumption are maximised when each country
specialises in producing and trading goods for which it has a
comparative advantage.
2. Example of the advantages of 2 countries
- Example of absolute advantage:
Suppose Thailand can produce 100 cars or 56 motobikes with a given
amount of resources. Country Vietnam, however, can produce 65 cars
and 120 motobikes with its resources. Apparently, this situation shows
that Thailand has an absolute advantage in producing cars. At the
same time, Vietnam has an absolute advantage in producing
motobikes.
- Example of comparative advantage:
Cambodia, with all its resources, can produce 200 kgs of coffee, or
100 kgs of tea. Similarly, Vietnam, with all its resources, can produce
180 kgs of coffee or 96 kgs of tea.
In this example, the opportunity cost for Cambodia for producing
coffee is 0.5 kgs of tea, while the opportunity cost for producing tea is
2kgs of coffee.
Similarly, the opportunity cost for Country Vietnam is 0.533 kgs of
tea and 1.875 kgs of coffee, respectively. Thus, on the basis of
comparative advantage, it will be beneficial for Vietnam to produce
coffee and Cambodia should produce tea.