Question

Define absolute and comparative advantages. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.

Answer 1

ANSWER:

Absolute advantage: A country will have an absolute advantage if it can produce goods at a lower cost then the other country.

Comparitive advantage: A country will have a comparitive advantage when it can produce goods more efficiently then the other country.

Example : Lets assume there are 2 countries in the world shormania and tormania and they produce only 2 goods that is wheat and rice.

	shormania	tormania
wheat	1000	1200
rice	800	1000

in this example tormania has an absolute advantage in producing both wheat and rice as it can produce 1200 units of wheat and 1000 units of rice which is more then that of shormania.

shormania has an comparitive advantage in producing wheat as for 1 unit of wheat shormania produces 800 / 1000 = 0.8 units of rice while tormania produces 1000 / 1200 = 0.83 units of rice per unit of wheat.