Comparative vs.

Absolute Advantage
 Absolute vs. Comparative Advantage
 Absolute Advantage:
 Either: A) a individual/firm/country can can produce more
of a good with the same input as another country
 B) Can produce a certain output using a fewer amount of
resources as another (mainly illustrated in terms of time)
 LEBRON HAS ABSOLUTE ADVANTAGE IN MOWING HIS
LAWN!
 Comparative Advantage:
 Whoever can produce a good with a lower opportunity
cost!!!
 More influential in production than absolute advantage!
 FELIX HAS COMPARATIVE ADVANTAGE IN MOWING
LEBRON”S LAWN!
 Result of Specialization

 Production of “Widgets” demonstration

 Why don’t we all make our own houses,
grow/gather our own food, heal our own
wounds?
 Trade
 Increases our standard of living…we assume
 Specialization—the division of tasks which
leads to gains from trade (me and you, or
entire world economy)
 Why Comparative Advantage is Key
 Suppose that an American worker can produce 50 shirts or
200 bushels of wheat per day. A Chinese worker can
produce only 25 shirts or 50 bushels of wheat.
 The U.S. has an absolute advantage in shirt production
since a U.S. worker can produce more shirts than a
Chinese worker.
 The U.S. has an absolute advantage in wheat
production since a U.S. worker can produce more wheat
than a Chinese worker.

 Issue to resolve: Does it pay for the U.S to trade

with China?
Why Comparative Advantage is
Key
 To understand how each country decides which
good to produce when they interact, we
calculate opportunity cost:
 U.S.: 1 shirt costs 4 bushels of wheat—1
wheat costs ¼ shirt
 China: 1 shirt costs 2 bushels of wheat –1
wheat costs ½ shirt

 Therefore, China should specialize in shirts and

the U.S. in wheat.
 Absolute and Comparative
Advantage Illustrated
 Which is which?
 Country B—Absolute in both
 Country A—Comparative in
car production
Gains From Trade
Suppose the U.S. has 150 million workers and China 800 million.
Without trade, each nation produces and consumes on their own based
on their preferences.
Let us assume the U.S. produces 5 billion shirts and 10 billion
wheat.
Let us assume China produces 10 billion shirts and 20 billion
wheat.
Alone, they are inefficient because…
When specialized, producing the good they have a comparative
advantage
in total production increases. See below…
Gains From Trade
 Remember…

 NO country has comparative advantage in

everything and every country has comparative
advantage in something…
 This fact deems trade essential for
“efficient” production
 What is this interaction called?
 What are its implications on the world and
it’s people?
 Economic Literacy Assignment #1