Using numerical examples, explain absolute and comparative advantage

10 marks

Numerical example of absolute advantage

Paragraph for absolute advantage

Define absolute advantage:

• Occurs when a country can produce more output using the same amount of resources than another country

Explanations using the example:

• Country A can produce more cars (10 vs 5) and more wheat (20 vs 10) than Country B in the same time period.

• This means Country A has an absolute advantage in both goods, as it is more productive in each case.

• Country B has no absolute advantage, as it produces fewer goods using the same resources.

Numerical example for comparative advantage

Paragraph for comparative advantage

Define comparative advantage:

• Occurs when a country can produce a good at a lower opportunity cost than another country.

Calculate the opportunity costs:

Country A:

• 1 car=1 wheat

• 1 wheat= 1 car

Country B:

• 1 car=3 wheat

• 1 wheat=0.33 cars

Explanation using the example:

• Country A has a lower opportunity cost in car production (1 wheat per car compared to 3 wheat in Country B), so it has a comparative advantage in cars.

• Country B has a lower opportunity cost in wheat production (0.33 cars compared to 1 car in Country A), so it has a comparative advantage in wheat.

• If each country specialises in the good they have a comparative advantage in and trades, total global output increases, allowing both countries to benefit from trade.