A country may have two advantages over another country (or countries) regarding trade.

ABSOLUTE ADVANTAGE

  • Specialization
Absolute advantage occurs when a producer can use the smallest amount of inputs to produce a given amount of output compared to other producers. Absolute advantage may apply to many countries.
Specialization.
is often referred to absolute advantage. In specialization, the use of resources of an individual, a firm, a region, or a nation is concentrated on one or small number of goods and services.
Example 1 (Absolute Advantage):
Say Farm A is able to produce one pound of tomatos in five hours, Farm B is able to produce one pound in two hours, and Farm C can produce one pound of tomatoes in one hour. In this case, Farm C has the absolute advantage in tomato production because it is able to produce the largest amount of output in the smallest amount of time. In addition, Farm C has a lower cost production than Farm A and B
Example 2 (Absolute Advantage):
external image cadv.gif
Country A has an absolute advantage in the production of both maize and wheat. At all points its production possibility curve lies to the right of that of Country B. Country B has an absolute disadvantage.

COMPARATIVE ADVANTAGE

  • opportunity cost
Comparative advantage happens when a producer has a lower opportunity cost of production than another producer. Comparative advantage may also apply to many countries. Often times, if a producer chooses to produce one good, he or she must give up the opportunity to produce another good. This is called the
opportunity cost
of producing a good. If two producers specialize, each according to its comparative advantage, each can achieve a larger total output with the same total input of resources. Together, two producers wil be using their scarce resources efficiently.

Example 1 (Comparative Advantage):

In another example with Farm B and C, both are able to produce tomatos and radishes. Farm C can produce 1 pound of tomatoes in 2 hours and can harvest 5 pounds of radishes in 2 hours. Farm B can produce 1 pound of tomatoes in 10 hours and 50 pounds of radishes in 2 hours. This information is relevant towards comparative advantage because Farm C can produce 1 pound of tomatoes in an hour while it takes Farm B 10 hours to produce 1 pound of tomatoes. On the other hand, Farm B can produce 1 pound of radishes in about 2 and a half minutes, but it takes Farm C about 24 minutes to produce a pound of radishes. Since each of these farms only has a fixed number of hours to spend producing, each hour spent producing tomatoes cannot be spent producing radishes, and each hour spent producing radishes cannot be spent producing tomatoes. For every hour Farm C spends producing radishes, it gives up 0.5 pounds of tomatoes, and for every hour that Farm C spends producing tomatoes, it gives up 0.1 pounds of radishes. Farm B gives up 25 pounds of radishes for every hour that it spends producing tomatoes, and for every hour that Farm B spends producing radishes, it gives up 0.1 pounds of tomatoes.
Farm C has an opportunity cost of 0.1 pounds of radishes for every 0.5 pounds of tomatoes produced, as well as 5 pounds of tomatoes for every 1 pound of radishes produced. Farm B has an opportunity cost of 0.1 pounds of tomatoes for every 25 pounds of radishes produced, or 250 pounds of radishes for every pound of tomatoes produced.

Opportunity cost of
tomatoes in terms of
radishes
Opportunity cost of
radishes in terms of
tomatoes
Farm C
1/5
5
Farm B
250
1/250
The figure above shows the situation between Farm B and C from the previous paragraph. Notice that for Farm C, the opportunity cost of producing tomatoes is lower than the opportunity cost of producing radishes. Similarly, for Farm B, the opportunity cost of producing radishes is lower than the opportunity cost of producing tomatoes. In both of these cases, this means that both farms are better off spending their time producing the product that they are most efficient in producing
The producer with the lower opportunity cost of production is said to have the comparative advantage. Notice that in a case with two producers and two products, each producer must have a comparative advantage in one, and not both, products. Looking again at the figure above, it makes finding the comparative advantage easy. Whichever producer has the lower opportunity cost has the comparative advantage and should produce that product.
Since Farm C has a lower opportunity cost of tomatoes in terms of radishes, it should produce tomatoes and Farm B shouldn't. Since Farm B has a lower opportunity cost of radishes in terms of tomatoes, it specializes in producing radishes while Farm C doesn't.

Example 2 (Comparative Advantage):
In a two-goods (grapes and nuts) two-persons (Tom and Mary) economy, Tom would have comparative advantage in producing nuts if his opportunity cost of producing nuts in terms of grapes foregone is lower than Mary. In graphical terms, Tom's PPC (PPF) would have a flatter slope viewed from the nuts axis in the grapes-nuts space. But the intercept of Tom's PPC on the nuts axis need not be higher than that of Mary's PPC on the same axis.

comparative advantage
comparative advantage


When a producer has an absolute advantage, he or she can produce a given output by using fewer inputs than any competing producer. When a producer has a comparative advantage, he or she can produce one product with a smaller amount of inputs than the competition. He or she therefore must produce another product with a greater amount of inputs than the competitor. Both absolute and comparative advantage appear within an open economy, one that includes a international sector. When either an absolute advantage or a comparative advantage exists, benefits from trade are guaranteed.


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Link To The Articles + Summary:

http://www.independentngonline.com/DailyIndependent/Article.aspx?id=29381

Abstract: Dory Devlin analyzes Spousanomics by Paula Szuchman and Jenny Anderson where it is suggested economics could be used to strengthen the relationship between a married couple. More specifically, Devlin studies how comparative advantage, which defines that an individual, firm, group, etc. should perform a certain task that is more specialized in than performing several tasks at minimum efficiency. In this case, the wife or husband should not be performing several different tasks at allocative or productive efficiency. Instead, she or he should only focus on one or two tasks that he or she is dominant in the specialization. By using division of labor, there is a relief in stress in a relationship and a couple does not have to stress on performing task that they a less specialized in. Comparative advantage lays within those foundation of what the wife may specialize in and what the husband specialize in. Ideally, the couple will have different areas of specialization.

http://www.cato.org/pub_display.php?pub_id=5354

This article asserts that there are 3 main reasons why countries should trade with one another. "Trade improves global efficiency in resource allocation". This reason illustrates the concept of specialization because countries should produce the good that they have the comparative advantage in, and benefit from the more efficient production of goods from other countries as well. This is demonstrated in the second reason that "trade allows partners to to gain from specializing in products" which reiterates the importance of overall efficiency and allows countries to gain huge benefits from trade. Thirdly, "trade allows consumers to benefit from more efficient methods of production", meaning that a single country doesn't have to excel in every process or product, but only needs to specialize in what they know best and share the benefits with other countries, who in turn will give the benefits of their efficient production methods.