Check out these other AP Macro resources
- 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.