Question

Define absolute advantage and explain how a country can have a comparative advantage in the production of a good even when it doesn't have an absolute advantage in the production of that good.
Absolute advantage:
Explanation of comparative advantage:​

Answer 1

Answer:

Absolute advantage occurs when a country can produce a given good for less labor than all the other countries in the world.

For example, if there are only two countries, and country A can produce a bottle of wine in two hours of labor, while country B can produce the same bottle of wine in three hours of labor, then country A will have the absolute advantage in the production of wine.

Countries do not need to have any absolute advantage to engage and benefit from trade. The reason is that it is comparative advantage what determines trade patterns, and gains from trade. Comparative advantage occurs when a country can produce a good for a lower relative cost in terms of opportunity cost than another country.

For example, suppose that Japan can produce 1 bike in 3 hours, and 1 car in 6 hours, while China can produce 1 bike in 5 hours, and 1 car in 7 hours.

Japan clearly has the absolute advantage in the production of both goods, but China has the comparative advantage in the production of cars, and the reason is that for China, producing 1 car has a cost, in terms of bikes, of 1.4 bikes, while for Japan, producing 1 car has a cost, in terms of bikes, of 2 bikes.

Thus, China has the lower relative (opportunity cost) for producing cars, which means that China has the comparative advantage in car production even if it does not have the absolute advantage in the production of either of the goods.