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Chapter 33: Q.8 (page 803)

What is absolute advantage? What is comparative advantage?

Short Answer

Expert verified

Ability to produce at lower absolute cost; Ability to produce at lower opportunity cost

Step by step solution

01

Step 1. Background

Opportunity cost refers to the cost of giving up the second-best alternative. In making economic decisions, certain economic cost is involved because of limited resources and alternative uses.

02

Step 2. Explanation 

Absolute advantage can be defined as the ability to produce a product at a lower cost or to produce more units at the same cost. For instance, if person A takes 8 hours to make a piece of cloth and person B takes 9.5 to produce the same cloth, then person A is said to have an absolute advantage.

Comparative advantage can be defined as the ability to produce a product at a lower opportunity cost than others. For instance, to do farming person A has to give up another activity that could have earned him $100. Person B has to give up a job that could have earned him $50. Then person B is said to have a comparative advantage in farming.

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Most popular questions from this chapter

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.

a. Who has the absolute advantage in the production of rubber or radios? How can you tell?

b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios?

c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber?

d. In this example, does each country have an absolute advantage and a comparative advantage in the same good?

e. In what product should Japan specialize? In what product should Malaysia specialize?

Under what conditions does comparative advantage lead to gains from trade?

Are the gains from international trade more likely to be relatively more important to large or small countries?

Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain.

What is intra-industry trade?
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