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Absolute & Comparative Advantage

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by

Jenna Whitsitt

on 13 June 2013

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Transcript of Absolute & Comparative Advantage

Example
Absolute Advantage
A nation having absolute disadvantages in the production of two goods with respect to another nation has a comparative advantage in the production of the good in which its absolute disadvantage is less.
Absolute & Comparative Advantage
Comparative
Advantage

Absolute
Advantage

A nation has absolute advantage when it can produce a larger amount of a good or service for the same amount of inputs as can another country or when it can produce the same amount of a good or service using fewer inputs than could another country.
Comparative Advantage
Two brothers are picking fruit in a field of apple trees and strawberry patches.
The brothers must harvest the entire field. Fred, the first brother, is nearly 7 feet tall. George, the second, is 5 feet tall.
Fred picks apples, because he is taller and George cannot. George picks strawberries because he is closer to the ground.
Comparative Advantage
7'
5'
George is vertically-challenged so he has a comparative advantage picking things low whereas the Fred is tall so he may pick the higher fruit.
Divide into two groups
Each group can use paper, scissors, a ruler, and a pencil
One group will receive a star stencil
Goal: have the highest value in stars and triangles at the end of the game
Stars & Triangles:
Round One
In this round your country will specialize in just one commodity. If your group has star templates, then you will produce stars while the other will concentrate on just triangles.

At then end of five minutes, record your production figures.

What is the world production level after specialization?
Discussion
Game Play
You will have 5 minutes to produce as many triangles and stars as possible. You must produce the goods accurately and one at a time. You will have half of the time to produce stars and half for triangles. Record numbers of each at the end of the round.
Round Two
Round Three
Arrange trade between the two countries to replenish your missing product from Round Two. Negotiate how many stars you are willing to exchange for each triangle.
How did this exercise represent absolute advantage?

How does specialization change the outcome of production?
Specialization
Absolute Advantage
One team had an absolute advantage in stars thanks to star templates. The added resource (input) allowed for more efficiency in difficult star cutting.
Specialization allows teams to become proficient in the product in which they have an absolute advantage.
Jenna Whitsitt
By:
Wrap-Up
A country has an absolute advantage if it can produce more of a product will the same or less inputs

A country has a comparative advantage in a product where its absolute disadvantage is less
Absolute Advantage
Comparative Advantage
Full transcript