Absolute Advantage When it is possible for one country to produce more goods and services than other countries with the same level of inputs (lower cost/unit)

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Presentation transcript:

Absolute Advantage When it is possible for one country to produce more goods and services than other countries with the same level of inputs (lower cost/unit) Eg. Zambia has large reserves of copper ore  is better suited to produce copper for export This is not main reason for international trade

Comparative Advantage When a country can produce a good or service at a lower opportunity cost than another country Even if absolute disadvantage exists for a country, it can still benefit its neighbours with trade by focusing on the good with a lower opportunity cost than theirs (they give up less than the other country)

Comparative Advantage & PPF Corn 9 Because the PPF gradients are different, these two countries have different opportunity costs between Corn and Wheat they will trade! **Opportunity cost = sacrifice/gain Country X 6 Country Y 5 6 Wheat The opp. cost of Country Y producing wheat is 6/5 (sacrifice over gain) The opp. cost of Country X producing wheat is 9/6 So, Country X should do the wheat (lower opportunity cost)

Comparative Advantage & PPF Corn Because the PPF gradients are the same, these two countries have the same opportunity costs between Corn and Wheat they will not trade! * Country X MAY have an absolute advantage, or it may just have more resources. 6 Country X 5 Country Y 5 6 Wheat

Comparative Advantage & Opportunity Cost Wheat Corn Country A 5 10 Country B 4 2 Opportunity Costs: For country A to gain 1 unit of wheat, they would give up 2 units of corn. For country B to gain 1 unit of wheat, they would give up ½ unit of corn. For country A to gain 1 unit of corn, they would give up ½ unit of wheat For country B to gain 1 unit of corn, they would give up 2 units of wheat Country A should produce corn and country B should produce wheat

Comparative Advantage & Opportunity Cost Textiles Cars China 15 5 Japan 1 4 Opp. cost in China of 1 unit of textile is 1/3 car Opp. cost in Japan of 1 unit of textile is 4 cars Opp. cost in China of 1 car is 3 units of textile Opp. cost in Japan of 1 car is 1/4 unit of textiles China should produce textiles & Japan cars.