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What is an absolute advantage? What is a comparative advantage? Give an example where you have an absolute but not a comparative advantage. Why should we specialize and trade? 

Jan 9th, 2015

What is an absolute advantage? 
  • the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
What is a comparative advantage? 
  • the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
Example

A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.

Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it! How can that happen?

First, let's get some more vocabulary. Someone who is the best at doing something is said to have an absolute advantage. Michael Jordan has an absolute advantage at basketball. For all I know, Michael Jordan may also be the fastest typist in the world, giving him an absolute advantage at typing, too. Since he's better at typing than you, can't he type more cheaply than you? That is, if someone has an absolute advantage in something, doesn't he automatically have a comparative advantage in it?



Jan 9th, 2015

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