Absolute Advantage
• With a given amount of resources Australia can
produce 30 units of wheat and 20 units of cloth. While
China can produce 5 units of wheat and 25 units of
cloth.
• In this example Australia produces more wheat while
China can produce an absolute advantage in the
production of cloth.
• Australia then has an absolute advantage in the
production of wheat and China an absolute
advantage in the production of cloth.
Absolute advantage
Wheat (units)
Cloth (units)
Australia
30
20
China
5
25
Total
35
45
Australia produces more wheat while China can
produce more cloth.
Production gains after
specilisation
Australia
Wheat
(units)
60(+30)
Cloth
(units)
0(-20)
China
0(-5)
50(+25)
Total output
60(+25)
Net gain
50(+5)
Net gain
Production gains after
specialisation
• When each country specialises in the
production of the goods they have a
comparative advantage in, greater production
of both goods could occur.
• In the slide you have just seen the production
of wheat has increased by 25 units and
production of cloth by 5 units.
Comparative advantage
Wheat units
Cloth units
Australia
20
10
China
5
5
Total output
25
15
Comparative advantage
• In the slide that you have just seen ,
Australia has an absolute advantage in
the production of both wheat and cloth.
By using the theory of comparative
advantage, both countries can gain from
specialisation and trade.
By using the theory of comparative advantage,
both countries can gain from specialization and
trade.
Opportunity Cost
Country
1 unit of wheat
1 unit of cloth
Australia
0.5 (10/20)
units of cloth
2 (20/10) units
of wheat
China
1 (5/5) units of
cloth
1 (5/5) units of
wheat
From the slide you have just
seen
• Australia has a comparative advantage in the production of
wheat since it has to give up only 0.5 units of cloth to produce
an extra unit of wheat, while China must give up 1 unit of cloth
to produce an extra unit of wheat. So it is more practical for
Australia to specialise in the production of wheat.
• China has a comparative advantage in the production of cloth
since it has to give up only 1 unit of wheat to produce an extra
unit of cloth, while Australia must give up 2 units of wheat to
produce an extra unit of cloth. Consequently it is more practical
for China to specialise in the production of cloth.
Comparative Advantage
• Australia has a comparative advantage
in the production of wheat and China
cloth. Trade between the two countries
should be beneficial because of the
different opportunity costs for these
commodities
Production levels after
Specialisation
Wheat (units)
Cloth (units)
Australian
40 (+20)
0 (-10)
China
0 (-5)
10 (+5)
Total output
40(+15)
(net gain)
10 (-5)
(net gain)
Specialisation
• We can see that total output has
increased when countries specialise in
the production of goods and services
based on comparative advantage. As
both countries are using their resources
more efficiently, trade will lead to higher
standard of living than would be
otherwise possible