{"id":599,"date":"2015-04-22T19:41:00","date_gmt":"2015-04-22T19:41:00","guid":{"rendered":"https:\/\/courses.candelalearning.com\/masterybusiness1xngcxmaster\/?post_type=chapter&p=599"},"modified":"2015-10-05T20:16:10","modified_gmt":"2015-10-05T20:16:10","slug":"reading-absolute-and-comparative-advantage","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-introbusinesswmopen\/chapter\/reading-absolute-and-comparative-advantage\/","title":{"raw":"Reading: Absolute and Comparative Advantage","rendered":"Reading: Absolute and Comparative Advantage"},"content":{"raw":"
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Absolute and Comparative Advantage<\/h2>\r\n

To understand why certain countries import or export certain products, you need to realize that every country (or region) can\u2019t produce the same products. The cost of labor, the availability of natural resources, and the level of know-how vary greatly around the world. Most economists use the concepts of absolute advantage<\/em><\/strong> and comparative advantage<\/em><\/strong> to explain why countries import some products and export others.<\/p>\r\n\r\n

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Absolute Advantage<\/h3>\r\nA nation has an absolute advantage<\/span><\/span> if (1) it\u2019s the only source of a particular product or (2) it can make more of a product using the same amount of or fewer resources than other countries. Because of climate and soil conditions, for example, France had an absolute advantage in wine making until its dominance of worldwide wine production was challenged by the growing wine industries in Italy, Spain, and the United States. Unless an absolute advantage is based on some limited natural resource, it seldom lasts. That\u2019s why there are few, if any, examples of absolute advantage in the world today.\r\n\r\n<\/div>\r\n
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Comparative Advantage<\/h3>\r\nHow can we predict, for any given country, which products will be made and sold at home, which will be imported, and which will be exported? This question can be answered by looking at the concept of comparative advantage<\/span><\/span>, which exists when a country can produce a product at a lower opportunity cost compared to another nation. But what\u2019s an opportunity cost<\/em>? Opportunity costs are the products that a country must decline to make in order to produce something else. When a country decides to specialize in a particular product, it must sacrifice the production of another product.\r\n\r\nLet\u2019s simplify things by imagining a world with only two countries\u2014the Republic of High Tech and the Kingdom of Low Tech. We\u2019ll pretend that each country knows how to make two and only two products: wooden boats and telescopes. Each country spends half its resources (labor and capital) on each good. Table\u00a01 shows the daily output for both countries: High Tech makes three boats and nine telescopes while Low Tech makes two boats and one telescope. (They\u2019re not highly productive, as we\u2019ve imagined two very<\/em> small countries.)\r\n\r\nTable 1. Comparative Advantage in the Techs\r\n\r\n\"Chart<\/a>\r\nWhen we assumed that High Tech spent half of its time on boats and half of its time on telescopes, it was able to make nine telescopes (see Figure\u00a01). If it gives up the opportunity to make the nine telescopes, it can use the time gained by not making the telescopes to make three more boats (the number of boats it can make with half of its time). Because High Tech could make three more boats by giving up the opportunity to make the nine telescopes, the opportunity cost of making each boat is three telescopes (9 telescopes \u00f7 \u00a0by 3 boats = 3 telescopes). First, note that High Tech has an absolute<\/em> advantage (relative to Low Tech) in both boats and telescopes: it can make more boats (three versus two) and more telescopes (nine versus one) than Low Tech can with the same resources. So, why doesn\u2019t High Tech make all<\/em> the boats and all<\/em> the telescopes needed for both<\/em> countries? Because it lacks sufficient resources to make all the boats and all the telescopes, High Tech must, therefore, decide how much of its resources to devote to each of the two goods. Let\u2019s assume that each country could devote 100 percent of its resources on either<\/em> of the two goods. We\u2019ll pick boats as a start. If both countries spend all<\/em> their resources on boats (and make no telescopes), here\u2019s what happens:\r\n