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.
Problems
- Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.
- Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.
- Identify which country has the comparative advantage.
- How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?