comparative advantageWhat is the difference of absolute and comparative advantage? Give example?

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justaguide eNotes educator| Certified Educator

To understand the difference between absolute advantage and comparative advantage consider two manufacturers A and B and two products P1 and P2 that each of them can manufacture.

If with the same resources A can produce 3 units of P1 and 4 units of P2 while B can produce 2 units of P1 and 1 unit of P2 A has an absolute advantage over B in both P1 as well as P2.

On the other hand, for each unit of P1 produced B only loses out on producing 0.5 units of P2 while A is not able to produce 1.3 units of P2 for each unit of P1 produced. This gives B a comparative advantage over A as far as P1 is concerned.

pohnpei397 eNotes educator| Certified Educator

You have an absolute advantage if you can make a unit of a certain product while using fewer resources than someone else can.  You have a comparative advantage if your opportunity cost for making that product is lower than someone else's.  Often, rich countries will have absolute advantages in many things because they have more machines, etc, to allow them to create the good more efficiently.  But they would incur high opportunity costs because those machines and people could be making high value products while the people in a developing country do not have such high opportunity costs.

accessteacher eNotes educator| Certified Educator

You might like to examine these concepts in the light of "offshoring," when companies "offshore" the manual side of their labour to developing world countries because they can do the work much cheaper than paying Americans or Europeans to do it, which would be much more expensive. In your terms, offshoring gives companies a comparative advantage, as the opportunity cost is reduced.

litteacher8 eNotes educator| Certified Educator
Someone who has an absolute advantage has an advantage no matter what. I might have lower production costs than you, and that gives me the advantage. Comparative advantage, on the other hand, can change as your individual circumstances change if you can no longer make more money elsewhere.