Unit 7 - Absolute/Comparative Advantage (5-9-16)

Absolute Advantage

Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time. (or can produce a good using the least amount of resources)

Natural: exists when a country can produce more of a good/service than another country can in the same time period.

Comparative

• producer with the lowest opportunity cost
• a person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner

Output:

• tons per acre
• miles per gallon
• words per minute
• apples per tree
• tv's produced per hour

Input:

• number of hours to do a job
• number of acres to feed a house
• number of gallons to paint a house

 

Specialization and Trade

•  Gains from trade are based on comparative advantage not absolute advantage