This lesson on absolute and comparative advantage will be on the Basic Economic Concepts portion of the AP examination(s).
Different countries have different resources, causing them to have different production possibilities, as learned in past lessons.
Thus, comparing different countries will demonstrate that certain countries will be better or worse at producing certain products than other countries.
For instance, let us say that Countries A and B both produce apple juice and orange juice.
Here are the production possibilities for Country A, given their current resources:
Here are the production possibilities for Country B, given their current resources:
When glancing at the production possibilities of both countries, it is evident that Country A produces more apple juice than Country B when given the same amount of resources.
Therefore, Country A has an absolute advantage in the production of apple juice.
Likewise, Country B produces more orange juice than Country A when given the same amount of resources.
Therefore, Country B has an absolute advantage in the production of orange juice.
Essentially, a country has an absolute advantage in the production of a good when it can produce a larger amount of that good with the same amount of resources.
Now, we must consider the question: which country should produce which good?
To answer this, we must find the opportunity cost of producing both goods for each country.
Let's start with Country A, which can produce 4 bottles of apple juice or 1 bottle of orange juice.
To find the opportunity cost of producing a single bottle of apple juice, divide the number of bottles of orange juice produced by the number of bottles of apple juice produced.
Therefore, the opportunity cost of producing 1 bottle of apple juice is 0.25 bottles of orange juice for Country A.
Similarly, the opportunity cost of producing 1 bottle of orange juice is 4 bottles of apple juice for Country A.
Basically, to find the opportunity cost of producing one unit of good X, divide the amount of good Y that is able to be produced by the amount of good X that is able to be produced.
Now, we can find the opportunity cost of producing both goods for Country B.
The opportunity cost of producing 1 bottle of apple juice is 1 bottle of orange juice for Country B, while the opportunity cost of producing 1 bottle of orange juice is 1 bottle of apple juice.
The final step is to compare the opportunity costs, and have the country with the lower opportunity cost for each good produce that good.
Let's look at the opportunity cost of producing 1 bottle of apple juice for both countries:
Since Country A has the lower opportunity cost, Country A should specialize in the production of apple juice.
Now, let's look at the opportunity cost of producing 1 bottle of orange juice for both countries.
Since Country B has the lower opportunity cost, Country B should specialize in the production of orange juice.
Therefore, Country A should produce apple juice while Country B produces apple juice.
In other words, Country A has a comparative advantage in the production of apple juice, while Country B has a comparative advantage in the production of orange juice.
A country has a comparative advantage in the production of a good when it can produce the good at a lower opportunity cost than another country.
Specialization is when the country which has a comparative advantage in the production of a good focuses on only producing that good. When each country specializes in the good it has a comparative advantage in producing, it makes the world economy efficient through trade.
In other words, these countries trade the goods which they specialize in exchange for the goods in which other countries specialize, so that each product is made at the lowest possible opportunity cost.
This lesson was (obviously) a simplification of how global trade works, but it gives you a feel for the principles of absolute and comparative advantage.
In this lesson, we covered an output question, which focuses on the production of goods for countries with the same number of resources.
In the future, we will look at input questions, which focus on the amount of resources required for countries to produce the same goods.
Different countries have different resources, causing them to have different production possibilities, as learned in past lessons.
Thus, comparing different countries will demonstrate that certain countries will be better or worse at producing certain products than other countries.
For instance, let us say that Countries A and B both produce apple juice and orange juice.
Here are the production possibilities for Country A, given their current resources:
Here are the production possibilities for Country B, given their current resources:
When glancing at the production possibilities of both countries, it is evident that Country A produces more apple juice than Country B when given the same amount of resources.
Therefore, Country A has an absolute advantage in the production of apple juice.
Likewise, Country B produces more orange juice than Country A when given the same amount of resources.
Therefore, Country B has an absolute advantage in the production of orange juice.
Essentially, a country has an absolute advantage in the production of a good when it can produce a larger amount of that good with the same amount of resources.
Now, we must consider the question: which country should produce which good?
To answer this, we must find the opportunity cost of producing both goods for each country.
Let's start with Country A, which can produce 4 bottles of apple juice or 1 bottle of orange juice.
To find the opportunity cost of producing a single bottle of apple juice, divide the number of bottles of orange juice produced by the number of bottles of apple juice produced.
Therefore, the opportunity cost of producing 1 bottle of apple juice is 0.25 bottles of orange juice for Country A.
Similarly, the opportunity cost of producing 1 bottle of orange juice is 4 bottles of apple juice for Country A.
Basically, to find the opportunity cost of producing one unit of good X, divide the amount of good Y that is able to be produced by the amount of good X that is able to be produced.
Now, we can find the opportunity cost of producing both goods for Country B.
The opportunity cost of producing 1 bottle of apple juice is 1 bottle of orange juice for Country B, while the opportunity cost of producing 1 bottle of orange juice is 1 bottle of apple juice.
The final step is to compare the opportunity costs, and have the country with the lower opportunity cost for each good produce that good.
Let's look at the opportunity cost of producing 1 bottle of apple juice for both countries:
Since Country A has the lower opportunity cost, Country A should specialize in the production of apple juice.
Now, let's look at the opportunity cost of producing 1 bottle of orange juice for both countries.
Since Country B has the lower opportunity cost, Country B should specialize in the production of orange juice.
Therefore, Country A should produce apple juice while Country B produces apple juice.
In other words, Country A has a comparative advantage in the production of apple juice, while Country B has a comparative advantage in the production of orange juice.
A country has a comparative advantage in the production of a good when it can produce the good at a lower opportunity cost than another country.
Specialization is when the country which has a comparative advantage in the production of a good focuses on only producing that good. When each country specializes in the good it has a comparative advantage in producing, it makes the world economy efficient through trade.
In other words, these countries trade the goods which they specialize in exchange for the goods in which other countries specialize, so that each product is made at the lowest possible opportunity cost.
This lesson was (obviously) a simplification of how global trade works, but it gives you a feel for the principles of absolute and comparative advantage.
In this lesson, we covered an output question, which focuses on the production of goods for countries with the same number of resources.
In the future, we will look at input questions, which focus on the amount of resources required for countries to produce the same goods.
Key Terms
Absolute Advantage - The advantage a country has when they can produce a greater amount of a good with the same amount of resources as another country or when they can produce the same amount of a good using a lesser amount of resources than another country.
Comparative Advantage - The advantage a country has when they can produce a good at a lower opportunity cost than another country.
Specialization - A country's decision to focus on the production of one good, because they produce this good most efficiently (they have a comparative advantage in the production of this good).
Trade - The exchange of goods by different countries with different specializations, in order to make economies more efficient.
Output Questions - Questions which are based on the production of the same goods by different countries.
Input Questions - Questions which are based on the resources used by different countries to make the same goods.
Review Question(s)
7. What is comparative advantage in the production of a good completely based on?
a) Monetary Cost
a) Monetary Cost
b) A country's GDP
c) Opportunity Cost
8. Why do countries specialize and trade?
a) Because it allows for all goods to be produced at the highest possible opportunity cost.
a) Because it allows for all goods to be produced at the highest possible opportunity cost.
b) Because it allows for all goods to be produced at the highest possible opportunity cost.
c) Country's GDP
Resources
To review key terms, go to the Quizlet here: https://quizlet.com/346378382/unit-1-lesson-6-absolute-and-comparative-advantage-flash-cards/?new
To watch a video explanation of comparative advantage, go to Jacob Clifford's video here: https://www.youtube.com/watch?v=ol4NexZ0iII
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