economic theory!! help please :(

[dipikey]

exams is in 2days for P2. but I still don't understand about comparative and absolute advantage? what's the different between those two? any1 can help me?

 

[Zohaib Sherazi]

Absolute advantage is linked with the amount of resources that you have to produce a product. Say you can produce 100 units of wheat with 150 units of resources as compared to another country that can only produce 50 out of the 150 units then you have an absolute advantage in wheat production.

On the other hand comparative advantage is linked with the domestic opportunity cost ratios. If you can produce 50 units of agricultural machinery out of the 150 units to which 100 units belong to wheat production. Then your opportunity cost in machinery production is 1 : 2 which means that in order to produce 1 unit of machinery you have to give up 2 units of wheat.

Now lets get back to the other country. It could produce 100 units of machinery and 50 units of wheat. So, its opportunity cost 2 : 1 which means it needs to give up only 1 unit of wheat and can produce 2 units of machinery. So, as you can produce 2 units of wheat by giving up only 1 unit of machinery you have a comparative advantage as you can use your resources better for wheat production. While the other country has a comparative advantage in the production of machinery. So, you can focus on wheat production and the other country on machinery.

 

[dipikey]

Absolute advantage is linked with the amount of resources that you have to produce a product. Say you can produce 100 units of wheat with 150 units of resources as compared to another country that can only produce 50 out of the 150 units then you have an absolute advantage in wheat production.

On the other hand comparative advantage is linked with the domestic opportunity cost ratios. If you can produce 50 units of agricultural machinery out of the 150 units to which 100 units belong to wheat production. Then your opportunity cost in machinery production is 1 : 2 which means that in order to produce 1 unit of machinery you have to give up 2 units of wheat.

Now lets get back to the other country. It could produce 100 units of machinery and 50 units of wheat. So, its opportunity cost 2 : 1 which means it needs to give up only 1 unit of wheat and can produce 2 units of machinery. So, as you can produce 2 units of wheat by giving up only 1 unit of machinery you have a comparative advantage as you can use your resources better for wheat production. While the other country has a comparative advantage in the production of machinery. So, you can focus on wheat production and the other country on machinery.

thx a lot for your help.. now I understand