Question

What is absolute advantage? What is comparative advantage?

Short answer

Both absolute and comparative advantage defines the efficiency of the firms, countries or individual for the reduction of the prices of goods and services.

Step-by-step solution

Step 1. Principle of Absolute advantage meaning.

It is the ability of a party or individual or firms or country to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first describe the principle of absolute advantage in the context of international trade in 1776, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness.

Step 2. Meaning of comparative advantage.

An economy's ability to produce a particular good or service at a lower opportunity cost then its trading partners. Comparative advantage is used to explain why companies, countries, or individual can benefit from trade. Basically, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.