Absolute & Comparative Advantage

Absolute and Comparative Advantage

In this section we see the difference between absolute advantage and comparative advantage to understand why countries benefit from trading with each other.

Absolute Advantage

To have an absolute advantage means the ability to produce a good using fewer inputs (less time, workers, money) than another producer. It can also be seen as the ability to make more goods in the same amount of time.

CANADA MEXICO

SHOES 40,000 90,000

BOOKS 4,000 6,000

The schedule above shows the maximum amount of two goods that can be made in a year in each country.

• ________ has an absolute advantage in shoes because they can make more shoes in the same amount of time.
• ________ has an absolute advantage in books because they can make more books in the same amount of time.

Production Possibility Curve (PPC)

• Production Possibility Curve (PPC) - a line that shows the different combinations of two products that can be produced
• Consumption Possibility Curve (CPC) - the same as the PPC but it shows the combinations of two products that can be consumed with trade.

Opportunity Cost

The opportunity cost is how much of one good must be given up to make one more unit of another good.

Opportunity Cost for Canada

• In the diagram above, the opportunity cost of making one book for Canada is ________ shoes.
• The opportunity cost of making one shoe for Canada is ________ books.

Opportunity Cost for Mexico

• The opportunity cost of making one book for Mexico is ________ shoes.
• The opportunity cost of making one shoe for Mexico is ________ books.

Comparative Advantage

• Comparative Advantage – this is when you have a lower opportunity cost of producing a product.
• ________ has a comparative advantage in books because they have a lower opportunity cost of making books.
• ________ has a comparative advantage in shoes because they have a lower opportunity cost of making shoes.
• This means Canada will specialize all their time in making books and then ________books to Mexico and ________shoes from Mexico