APMacro: Absolute Advantage and Comparative Advantage


Comparative advantage problems illustrate how two nations can trade even if one is more efficient at producing both products. The country that is more efficient in the production of a good is the country that can produce the good with the least input. In other words, if the United States can produce a ton of oats in three hours and Scotland can produce a ton of oats in four hours, the United States is more efficient in the production of oats. The United States would have an absolute advantage in the production of oats.

A nation has a comparative advantage in the good in which it has the lower opportunity cost. The nation should specialize in the good for which it has the lower opportunity cost and trade for the good for which the other country has the lower opportunity cost. A nation with an absolute advantage in the production of both goods will have a comparative advantage in the production of only one of these goods. For example:

Oranges Avocados CA

For the United States, the opportunity cost of producing one bushel of oranges is two bushels of avocados. For Israel, the opportunity cost of producing one bushel of oranges is four bushels of avocados. Therefore, it is cheaper in terms of avocados for the United States to produce oranges. The United States has the comparative advantage in producing oranges.

For the United States, the opportunity cost of producing one bushel of avocados is one-half a bushel of oranges. For Israel, the opportunity cost of producing one bushel of avocados is one-fourth of a bushel of oranges. Thus, it is cheaper in terms of oranges for Israel to produce avocados. Israel has the comparative advantage in producing avocados.

Arrows-02-june

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