Absolute and Comparative Advantage
In trade, absolute advantage is when a country can produce a greater quantity of a good or service with the same input (typically labor) at a lower cost. The theory of absolute advantage was developed by the Scottish economist Adam Smith in his book The Wealth of Nations.
Comparative advantage is a theory developed by the English political economist David Ricardo in his book On the Principles of Political Economy and Taxation. Comparative advantage, also called Ricardian advantage, describes one country's ability to produce a good or service at a lower opportunity cost than another country. Opportunity cost is the idea that making and selling one product or service is a trade-off, since you forfeit the opportunity to produce another product instead.
Read this section and answer the questions at the end.
Can a production possibility frontier be straight?
When you first met the production possibility frontier (PPF) in the chapter on Choice in a World of Scarcity it was drawn with an outward-bending shape. This shape illustrated that as inputs were transferred from producing one good to another - like from education to health services - there were increasing opportunity costs. In the examples in this chapter, the PPFs are drawn as straight lines, which means that opportunity costs are constant. When a marginal unit of labor is transferred away from growing corn and toward producing oil, the decline in the quantity of corn and the increase in the quantity of oil is always the same. In reality this is possible only if the contribution of additional workers to output did not change as the scale of production changed. The linear production possibilities frontier is a less realistic model, but a straight line simplifies calculations. It also illustrates economic themes like absolute and comparative advantage just as clearly.