The difference between ABSOLUTE ADVANTAGE and COMPARATIVE ADVANTAGE.





A country (or person) is said to have an ABSOLUTE ADVANTAGE in the production of a good or service if the country (or person) can produce the good or service with FEWER RESOURCES than the other country (or person).

A country (or person) is said to have a COMPARATIVE ADVANTAGE in the production of a good or service if the country (or person) can produce the good or service with LOWER OPPORTUNITY COST than the other country (or person).

An Example
Time it takes to

MOW A LAWN

Time it takes to

WASH A CAR

FRED 4 hours 3 hours
BARNEY 2 hours 1 hours

BARNEY has an ABSOLUTE ADVANTAGE in mowing lawns compared to FRED. Barney can mow a lawn with FEWER RESOURCES (less time) than Fred. [ 2 hours < 4 hours]

BARNEY also has an ABSOLUTE ADVANTAGE in washing cars compared to FRED. Barney can wash a car with FEWER RESOURCES (less time) than Fred. [ 1 hour < 3 hours]

OPPORTUNITY COST - the value of the next best alternative use of the same resources. (What do you forego?)

OPPORTUNITY COSTS FOR FRED

It takes Fred 4 hours to mow 1 lawn. In these 4 hours, what else could Fred have done? How many cars could Fred wash in 4 hours? Fred's opportunity cost of mowing a lawn is the number of cars he could wash in the time it takes him to mow a lawn. Thus,

1 lawn mowed (= 4 hours) = 4/3 cars washed

The opportunity cost of Fred mowing 1 lawn is foregoing washing 4/3 cars.

It takes Fred 3 hours to wash 1 car. In these 3 hours, what else could Fred have done? How many lawns could Fred mow in 3 hours? Fred's opportunity cost of washing a car is the number of lawns he could mow in the time it takes him to wash a car. Thus,

1 car washed (= 3 hours) = 3/4 lawns mowed

The opportunity cost of Fred washing 1 car is foregoing mowing 3/4 lawns.





OPPORTUNITY COSTS FOR BARNEY

It takes Barney 2 hours to mow 1 lawn. In these 2 hours, what else could Barney have done? How many cars could Barney wash in 2 hours? Barney's opportunity cost of mowing a lawn is the number of cars he could wash in the time it takes him to mow a lawn. Thus,

1 lawn mowed (= 2 hours) = 2 cars washed

The opportunity cost of Barney mowing 1 lawn is foregoing washing 2 cars.

It takes Barney 1 hour to wash 1 car. In this 1 hour, what else could Barney have done? How many lawns could Barney mow in 1 hour? Barney's opportunity cost of washing a car is the number of lawns he could mow in the time it takes him to wash a car. Thus,

1 car washed (= 1 hour) = 1/2 lawns mowed

The opportunity cost of Fred washing 1 car is foregoing mowing 1/2 lawns.



Opportunity cost of

MOWING A LAWN

Opportunity cost of

WASHING A CAR

FRED 4/3 cars washed 3/4 lawns mowed
BARNEY 2 cars washed lawns mowed

FRED has a COMPARATIVE ADVANTAGE in mowing lawns compared to BARNEY. Fred can mow a lawn with SMALLER OPPORTUNITY COST (foregoing less) than Barney. [ 4/3 cars < 2 cars]

BARNEY has a COMPARATIVE ADVANTAGE in washing cars compared to FRED. Barney can wash a car with SMALLER OPPORTUNITY COST (foregoing less) than Fred. [ lawns < 3/4 lawns]

NOTE: When you are comparing two people (or countries) and two activities (or products or services), if one person (or country) has a COMPARATIVE advantage in one activity (or product or service), then the other person (or country) will have a COMPARATIVE advantage in the other activity (or product or service).





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