Question

6.Explain the differences between absolute and comparative advantage.

7. Explain the relationship between scarcity and opportunity cost.

Answer 1

6. A producer which produces a particular good using a lower amount of inputs is said to have an absolute advantage in the production of that good. So, if India produces 1 bushel of wheat using 5 hours of labour and Pakistan produces 1 bushel of what using 3 hours of labour, Pakistan has an absolute advantage in the production of wheat.

A country which produces a particular good at a lower opportunity cost is said to have a comparative advantage in the production of that good. For example, suppose India and Bangladesh both produce only wheat and rice. Also, India's opportunity cost of producing 1 bushel of wheat is 0.5 bushel of rice and Bangladesh's opportunity cost of producing 1 bushel of wheat is 0.9 bushel of rice. In this case, India has a lower opportunity cost in the production wheat. So, India has a comparative advantage in the production of wheat.