Question

Please come up with an example of a situation where one person has an absolute advantage in the production of some good or service. Once you have defined the absolute advantage, describe a situation where a person has a comparative advantage.

Please remember to discuss the difference between the two situations and why each is an example of each kind of advantage.

Answer 1

The term absolute advantage refers to a person's ability to produce more of a good with the same amount of resources as compared to another person

The term comparative advantage refers to a person's ability to produce a given good at a lower opportunity cost than the other person

Example there are 2 person A and B producing coffee and lemon as follows

	Coffee	Lemon
A	10	20
B	5	8

As we can see from the table above that A has the absolute advantage in producing both goods as he can produce more of both as compared to B

To find the comparative advantage, we need to find the opportunity cost

OC of A to produce coffee = 20/10 = 2 and to produce lemon = 10/20 = 0.5

OC of B to produce coffee = 8/5 = 1.6 and to produce lemon = 5/8 = 0.625

so, A has the absolute advantage in producing both goods but a comparative advantage in producing Lemon and B has the comparative advantage in producing Coffee