1. Absolute Advantage
 Definition: When one country is more productive than another. Its productivity allows it to produce several, perhaps all, products more efficiently than the other country. More often, one country has an absolute advantage at producing one product, while another country is better at producing another, e.g. Italy for producing wine and Britain for producing peas. In the example below, ________________ has an absolute advantage in Guinness and ________________ has an absolute advantage in toys.
Ireland
China
Total
Guinness
800
100
900
Toys
200
300
500
It is obvious that ___________________ should specialise in the production of Guinness and _______________ should specialise in the manufacture of toys.
If we assume that (in the table above), each country divides its resources equally between the production of
Guinness and toys, then if each country specialises total output will increase. Complete the table below to show this.
Ireland
China
Total
2. Comparative Advantage
Guinness Toys
However the model of absolute advantage has its weaknesses. What if one country was best at producing both commodities? The model of comparative advantage will show that it is still beneficial to specialise and then trade.
2.1 Fill in the missing words
Definition: If the ______________________ ____________ ratios of two countries differ it is mutually advantageous to ______________________ and then ______________.
2.2 Assumptions of the model: For ease we assume two countries and two commodities but the model will work equally as well with as many countries and commodities as a person would like to include.
Complete four other assumptions (of comparative advantage) in the table below
1. 3.
2. 4.
2.3 Practice question
UK
Mobile
Phones
400
Cars
100
Each country has 2 units of labour, equally split producing mobile phones and cars. Given one unit, the UK can produce more cars or more mobile phones– it has the ABSOLUTE ADVANTAGE in both.
USA 200 100
World 600 200
When the UK builds one extra car it must sacrifice
____ mobile phones. The US sacrifices _____ mobile phones in
UK
Opp Cost of one mobile phone
_______ Cars return for a car. Therefore the opportunity cost ratios differ.
USA
Calculate the opportunity cost ratios and use them to complete the table.
_______ Cars
Opp Cost of one Car
______ Mobile
Phones
______ Mobile
Phones
The US has a COMPARATIVE ADVANTAGE in the production of _____ i.e. the opportunity cost of producing one
______ in the US is less than it is in the UK. Thus the UK has a comparative advantage in __________ production.
UK
Mobile phones
Cars The USA specialises in the production of _______, and transfers all its resources to _______ production. The UK produces _________.
Therefore total world output has risen.
USA Complete the table to show this gain in total world output.
World www.a-zbusinesstraining.com