Final answer:
Comparative advantage refers to producing goods at a lower opportunity cost, with the US and China specializing in high-skilled and low-skilled labor goods, respectively. Absolute advantage looks at higher production numbers, which can differ from comparative advantages. Canada and Venezuela should specialize in products which they produce at the lowest opportunity cost relative to each other.
Step-by-step explanation:
The concept of comparative advantage is a key principle in international trade and economics. It refers to the ability of a country to produce a good or service at a lower opportunity cost than another country. In the case study provided, the United States has a comparative advantage in producing goods that require high-skilled labor and technology, while China has a comparative advantage in goods that utilize low-skilled labor and less technology.
To determine who has the absolute advantage in the production of oil or lumber, we look at the larger of the numbers for each product. If Canada can produce more lumber with the same amount of labor compared to Venezuela, then Canada has the absolute advantage in lumber production. Conversely, if Venezuela can produce more oil with the same amount of labor compared to Canada, then Venezuela holds the absolute advantage in oil production.
The comparative advantage, on the other hand, is determined by opportunity costs and not just by output numbers. It's possible that one country might have the absolute advantage in producing both goods, but still, there might be a different distribution of comparative advantages. In our example, Canada should specialize in the product for which it has the lowest opportunity cost relative to Venezuela, which could be lumber, and Venezuela should specialize in oil, assuming it has the lower opportunity cost for that product.