theme 4 : absolute and comparative advantage

what is absolute advantage

the ability of a party (an individual or firm or country) to produce more of a good or service than competitors using the same amount of resources

what does the uk have a comparative advantage over other countries in

• financial services

• football

• sport

• education

• meat

what does ireland have a comparative advantage over other countries in

• alcohol (guinness, whiskey)

• potatoes

• agriculture

• crisps

• dancing

theory of absolute advantage

• economic agents should specialise in what they are best at

• this leads to increased productivity

• what is not self produced can be traded for another good (or money)

comparative advantage definition

ability of a party to produce a particular good or service at a lower opportunity cost over another (not necessarily producing what you’re best at, but producing what is of most value)

comparative advantage theory

• economic agents should specialise in what is most valuable (and has a low opportunity cost)

• this leads to increased productivity

• what is not self produced can be traded for another good (or money)

7 criticisms of comparative advantage

• overstate the benefits of specialisation by ignoring costs

• assumes markets are perfectly competitive

• may create structural unemployment

• relative prices and exchange rates are not taken into account

• not a static concept - may change over time

• many countries want food security meaning they prefer to keep a minimum level of food production

• concept is derived from a highly simplistic two good / two country model - real world is more complex