Download Absolute and Comparative Advantage: This is a theory that has

Absolute and Comparative Advantage:
This is a theory that has been around for a couple of hundred years. Absolute
Advantage exists when a country can make a product cheaper than another
country can. Comparative Advantage is a bit trickier. Between 2 countries
and 2 goods being produced, we can compare the financial cost and the
opportunity costs. What does a country have to give up to make a good? If it
is less than another country has to give up, then the first country has a
comparative advantage. Lets use this example, both the UK and China make
cars and cheese of equal quality. Imagine that it takes the UK 15 hours to
make a car and China 4 hours. China would have the Absolute Advantage in
producing cars. If it takes the UK 5 hours and China 2 hours to make cheese,
then China also has Absolute Advantage in making cheese. Opportunity Cost
is what you give up to make one product instead of another. For the UK to
make 1 car, they have to give up 3 cheeses. China has to give up 2 cheeses
to make 1 car. So, China has Comparative Advantage in car production. For
this same example, the UK would have Comparative Advantage in cheese
production because they are giving up less cars that China does to make
cheese. The real world is much more complicated that this example.
Production Possibility Curve
The Production Possibility Curve shows the maximum potential of output of
products of an economy. For this example, this economy produces TVs and
DVDs. If all resources go into making TVs, there would be 0 DVDs produced.
The same goes if the country uses all the resources to make DVDs, there
would be 0 TVs produced. If the resources were split to try and produce both
TVs and DVDs, then there are a number of opportunities for production. This
is what the Production Possibility Curve shows us. Opportunity cost is the
cost of the next best alternative, in other words, what do you give up to
produce something else. This example shows that if the curve moves from X
to Y, or downward on the curve, they can produce more DVDs, but they have
to give up more TVs. On the next example, if we use more factors of
production in an economy, the Production Possibility Curve will shift outward.
This would result in the economy producing more TVs without having to give
up DVDs.