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  • comparative & absolute advantage are terms we come across when we look at the gains in trading
  • we determine the advantages through simple calculations that we derive from 2 Production Possibilities curves of 2 different countries
  • to review what a PPC is, check out this article🧐

As with anything, it's better to explain through a scenario 😉.

  • say we have country A & B that want to trade
  • they both produce hats and cars
  • let's determine through comparative & absolute advantage to find out who should make what good

Country A can produce a maximum of 80 cars & 100 hats.
Country B can produce a maximum of 70 cars & 50 hats.

Their PPC graphs would look like this ⬇️

Absolute Advantage is who can make the most of one good.

  • For  🎩, Country A has the absolute advantage, & it does so for 🚘as well.
  • country A produce more cars and hats than country B ever could have

Now, comparative advantage is where it gets tricky...😰

Comparative Advantage
is who can make a good at a lower cost than anyone else. 💵💵💵

  • by cost, we mean would a country be better at making hats or cars
  • to calculate it, we see how much we lose for producing a certain item
  • to do the math, you simply divide the maximum of what you are not making by the maximum of what you are making
  • use the numbers from the chart above

To produce 1 car, country A loses 1.25 hats & country B loses about 0.71 hats

  • so country B has the comparative advantage for producing cars

To produce 1 hat, country A loses 0.8 cars & country B loses 1.4 cars

  • so country A has the comparative advantage for producing hats

The simple math I did just in case you got lost. I know I sure did 😓

Hope this helped. Till next time rêveur.

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