Question

What is the difference between absolute and comparative advantage? If Country A has an absolute advantage in computers and food over Country B, Country A has a comparative advantage in computers and Country B has a comparative advantage in food, what should happen in terms of specialization and trade?

Answer 1

Absolute advantage is just a nation producing more of a good numerically as compared to the other nation. For example, US producing 100 jets and china producing just 50, here, US have an absolute advantage in the production of jets.

Comparative advantage is the ability to produce the goods at a lower cost in terms of other products. i.e. if a nation can produce jets by giving up less trucks as compared to other nation then the nation having a lower opportunity cost have a comparative advantage in that good.

Absolute advantage doesn't decide the trade and specialization its the comparative advantage, here, if Country A has a comparative advantage in the production of Computer then they will specialise in the production of computer and export it and they will import food from country B.