Comparative Advantage

Comparative Advantage

• Specialization - Individuals and countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/need.

•   Absolute Advantage: The producer that can produce the most output OR requires the least amount of inputs (resources).

•    Comparative Advantage - The producer with the lowest opportunity cost.

•      Countries should trade if they have a relatively low opportunity cost.

•      Input VS Output

•     An output problem presents the data as products produced given a set of resources. (ex. Number of pens produced)

•     An input problem presents the data as amount of resources needed to produce a fixed amount of output. (Number of labor hours to produce 1 bushel)

• When identifying absolute advantage, input problems change the scenario from who can produce the most to two can produce a given product with the least amount of resources.