Question

What is absolute advantage? What is comparative advantage?

Short answer

Absolute Advantage is capability to produce more of a good. Comparative advantage is capability to produce a good at lower opportunity cost.

Step-by-step solution

Background

In the production of any good or service, there are certain explicit and implicit costs involved. the implicit cost or opportunity cost of an economic decision is the cost of second best lternative sacrificed.

Absolute Advantage - Example Explanation

Absolute Advantage is when an economy can produce more output per unit input of a commodity, as compared to other economy.

Production Possibilities of Country 1 & Country 2, for Good 1 & Good 2 :

	G1	G2
C1	100	400
C2	200	300

As country 2 can produce more of good 1 (200 units) than country 1 (100 units), it has absolute advantage in good 1.

As country 1 can produce more of good 2 (400 units) than country 1 (300 units), it has absolute advantage in good 2.

Comparative Advantage - Example Explanation

Comparative Advantage is when an economy can produce a good with lesser opportunity cost (ie other goods sacrificed), as compared to other economy.

Production Possibilities of Country 1 & Country 2, for Good 1 & Good 2 :

	G1	G2
C1	100	400
C2	200	300

Country 1 can produce good 1 by sacrificing 100/400 = 0.25 units of good 2, which is lesser than country 2 sacrifice of good 2 for good 1 (200/ 300 = 0.66 units). So, country 1 has comparative advantage in production of good 1.

Country 2 can produce good 2 by sacrificing 300/ 200 = 1.5 units of good 1, which is lesser than country 1 sacrifice of good 1 for good 2 (400/ 100 = 4 units). So, country 2 has comparative advantage in production of good 2.