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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.