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
MOW A LAWN WASH A CAR 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]
Time it takes to
Time it takes to
FRED
4 hours
3 hours BARNEY
2 hours
1 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 | ½ 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. [ ½ 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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