Question

Discuss the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns

Answer 1

A country has comparative advantage in production if it produces at a lower opportunity cost when compared to other countries while A country has absolute advantage in the production of a good or service if it produces more quantity of a good when compared to other countries

Comparative advantage is more important in determining trade patterns

Step-by-step explanation:

For example, country A produces 10kg of beans and 5kg of rice. Country B produces 5kg of beans and 10kg of rice.

for country A,

opportunity cost of producing beans = 5/10 = 0.5

opportunity cost of producing rice = 10/5 = 2

for country B,

opportunity cost of producing rice = 5/10 = 0.5

opportunity cost of producing beans = 10/5 = 2

Country A has a comparative advantage in the production of beans and country B has a comparative advantage in the production of rice

Country A has absolute advantage in the production of beans while country B has absolute advantage in the production of rice