Absolute and Comparative
Advantage
Absolute Advantage
• Absolute advantage is when someone is the
best at doing something
– America is the best at producing entertainment
– Colt Brennann (Hawaii) is the best at throwing
touchdown passes
– Lance Armstrong is the best cyclist
• Are there cases where someone might be the
best at something but it’s better for them to
not do it?
Comparative Advantage
• Yes! If Lance Armstrong is the best cyclist and
the best typist, while Susie Smith is a weak
cyclist and a moderate typist, who should do
which task?
– Comparative advantage is when a person can
produce something at a lower cost than anyone
else
– In this scenario, Susie has the comparative
advantage because it cost her less (in giving up a
weak cycling skill) to perform the typing.
Comparative Advantage
• In order to find people’s comparative
advantage you DO NOT compare their
absolute advantage.
– Instead compare their opportunity costs
– Why? Because we all know that superhuman that
is way better than us at everything—but can they
do it all? Nope.
• Therefore, we have to look at who has the lower
opportunity cost to determine who should do what task
(make which good).
Comparative Advantage
• America has an absolute advantage in technology
production and answering service calls when
compared to India
– So why does India answer the phones (even with hard
to understand accents for the caller)?
• Simple, America has to give up too many
technology producers (a very complex field) to
answer phones
– It is better to give away the inferior task, even if it’s
not going to be done to the superior nature it could
have been if it results in a higher quantity of the first
option (technology) being produced
Before learning Specialization
Look at the chart below—notice how
much each area is able to produce
Before
Hours Worked Production
Specialization
and
Consumption
Alaska
Brazil
4 (making
salmon)
5 pounds of
salmon
4 (making
coffee)
1 pound of
coffee
4 (making
salmon)
1 pound of
salmon
4 (making
coffee)
5 pounds of
coffee
• If Alaska works 8
hours with NO
TRADE they have
5lbs salmon and 1lb
of coffee
• If Brazil works for 8
hours with NO
TRADE they have
1lb of salmon and
5lbs of coffee
After Learning Specialization
After
Hours
Specialization Worked
Production
•
Alaska
8 (making
salmon)
10 pounds of
salmon
•
Brazil
8 (making
coffee)
10 pounds of
coffee
•
•
•
If they specialize and make what they
make best Alaska spends all it’s time
making salmon while Brazil only makes
coffee
Okay, so now what? The Alaskan has 10
pounds of salmon, but no coffee. How
can the Alaskan make this work to his
benefit?
TRADE! If he gives the Brazilian half his
salmon, he will still have 5 pounds of
salmon and now he’ll have 5 pounds of
coffee too!
Before specialization the Alaskan only had
1 pound of coffee—so in in the end, he
comes out with an extra 4 pounds of
coffee and didn’t have to do any
additional work!
This is why America, despite being
awesome at most things chooses to have
other countries produce some (okay,
many) of our goods. This allows us to
specialize in what is going to make us the
most money (bring most utility)
Sample Problems
Cars
Computers
United States
12
4
Japan
10
6
• Who has absolute
advantage in cars?
– United States
• Who has absolute
advantage in
computers?
– Japan
Sample Problems
Cars
Computers
United States
12
4
Japan
10
6
United States’ opportunity cost of computers:
12
3
----- = ----- = 3 cars
4
1
• Who has comparative
advantage in computers?
• Japan has comparative
advantage in computers
because they only have to
give up 5/3rds of a car
versus the U.S. who has to
give up 3 cars to make 1
computer
Japan’s opportunity cost of computers:
10
5
---- = ----- = 5/3rds of a car
6
3
• HINT: always put the item
asked about in the
denominator
Sample Problems
Cars
Computers
United States
12
4
Japan
10
6
United States’ opportunity cost of computers:
4
1
----- = ----- = 1/3rd of a computer
12
3
Japan’s opportunity cost of computers:
6
3
---- = ----- = 3/5th of a computer
10
5
• Who has comparative
advantage in cars?
• United States has the
comparative advantage
because they only have
to give up 1/3rd of a
computer versus 3/5ths
that Japan has to give
up
Video Clip
Economics in 60 Seconds
• http://www.youtube.com/watch?v=38hvvAzg
XZY
You Try
Bananas
Rice
Fiji
10
5
China
10
2
• Who has absolute
advantage in bananas?
• Who has absolute
advantage in rice?
• Who has comparative
advantage in rice?
• Who has comparative
advantage in bananas?
You Try
Bananas
Rice
Fiji
10
5
China
10
2
• Who has absolute
advantage in bananas?
– Neither-both produce 10
bananas
• Who has absolute
advantage in rice?
– Fiji has absolute
advantage
You Try
Bananas
Rice
Fiji
10
5
China
10
2
Fiji’s opportunity cost of bananas:
5
1
----- = ----- = 1/2 rice
10
2
China’s opportunity cost of bananas:
2
1
---- = ----- = 1/5 rice
10
5
• Who has comparative
advantage in bananas?
Explain.
• China
• China only gives up 1/5
rice whereas Fiji has to
give up 1/2 rice
You Try
Bananas
Rice
Fiji
10
5
China
10
2
Fiji’s opportunity cost of rice:
10
2
----- = ----- = 2 bananas
5
1
China’s opportunity cost of rice:
10
5
---- = ----- = 5 bananas
2
1
• Who has comparative
advantage in rice?
Explain.
• Fiji
• Fiji only has to give up 2
bananas whereas China
has to give up 5
bananas
Sample Problems
• A look at the worksheet (Lesson 1, Activity 2)
Vacuuming
Wash dishes
Mike
60 min.
30 min.
Debbie
45 min.
45 min.
What is Mike’s opp. cost of vacuuming in terms of washing
dishes? (In other words, how many loads of dishes does he
have to give up to vacuum the room)
Answer—2 loads of dishes (60 min./30 min.) = 2
Let’s try another one
Sample Problems
Vacuuming
Wash dishes
Mike
60 min.
30 min.
Debbie
45 min.
45 min.
What is Mike’s opp. cost of doing dishes in terms of vacuuming? (In
other words, how much vacuuming does he have to give up to do
dishes)
Answer—
1/2 of a room vacuumed (30 min./60 min.) = .5
What about Debbie?
She has to give up 1 room vacuumed for 1 load of dishes (45/45=1)
Sample Problems
• So if Debbie has to give up 1 room vacuumed
to do a load of dishes meanwhile Mike has to
give up ½ a room to do a load of dishes; who
has the comparative advantage of doing
dishes?
• Mike does because it only costs him ½ a room
to Debbie’s 1 room.