Absolute v. Comparative Advantage

1. Absolute v. Comparative Advantage Two countries: Bolivia and Canada

2. Goods • Two goods: Chairs and Sweaters • One resource: hours of labor

3. Absolute advantage: The ability to produce something using fewer resources than other producers use • Canada has absolute advantage in producing sweaters • Canada has absolute advantage in producing chairs

4. Comparative Advantage The ability to produce something at a lower opportunity cost than other producers face

5. Determining comparative advantage • How much does it cost to produce 1 chair? • The cost will be in terms of sweaters that could have been produced in the same amount of time as 1 chair • For Bolivia, how many sweaters could have been produced in 24 hours? • For Canada, how many sweaters could have been produced in 20 hours?

6. Determining comparative advantage • Bolivia has comparative advantage in producing chairs because it would mean having to give up fewer sweaters

7. Determining comparative advantage • How much does it cost to produce 1 sweater? • The cost will be in terms of (fraction of) a chair that could have been produced in the same amount of time as 1 sweater

8. Opportunity cost of 1 sweater • Canada has comparative advantage in producing sweaters because it would mean having to give up fewer chairs

9. Law of comparative advantage • The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that good. David Ricardo 1772-1823