Thursday, January 12, 2012

Compare and contrast the adsolute advantage and comparative advantaje theories.?

Absolute advantage means you are better at producing things overall, and a comparative advantage means you can produce one thing at a lower cost than the other person. Take for example beef and potatoes. One producer (A) can produce 1 oz of beef per hour and 1/2 oz of potatoes an hour, whereas producer B can produce 3/4 oz of beef per hour and 1/4 oz of potatoes an hour. In this example, producer A has the absolute advantage because they can produce both products more efficiently than producer B. But, producer B has a comparative advantage in producing potatoes because one hour of potato production only results in an opportunity cost of 3/4 oz of beef, whereas for producer A to produce an hour's worth of potatoes costs them 1 oz of beef. This leads to the lesson that trade and specialization can benefit both parties if producer A focuses most of his time on the production of beef and producer B focuses most of his time on the production of potatoes.

0 comments:

Post a Comment