Final answer:
Comparative advantage is about producing goods at a lower opportunity cost, while absolute advantage is about making more of a good with the same resources. To determine which product to specialize in, countries assess their opportunity costs relative to each other. A country should specialize in the production of goods for which it holds a comparative advantage.
Step-by-step explanation:
Comparative advantage is an economic theory that describes how, when different entities (such as countries or individuals) produce different goods at different opportunity costs, they can benefit from trading with each other. To determine which product a country should specialize in, we examine the opportunity cost of producing one good over another and specialize in the one with the lower opportunity cost. The absolute advantage refers to the ability of a country to produce more of a good with the same amount of resources than another country.
To determine absolute advantage, compare the total production output in each country. Country A has an absolute advantage in the production of good X if it can produce more of good X than Country B using the same resources. However, having an absolute advantage in producing both goods doesn't mean the country should produce both.
Comparative advantage is calculated by considering the opportunity cost of producing goods. If Country A sacrifices less of good Y to produce good X than Country B, then Country A has a comparative advantage in producing good X. Countries should specialize in the production of goods for which they hold a comparative advantage.
Example:
- Make a table comparing the production of two goods (like oil and lumber) between two countries (like Canada and Venezuela).
- Analyze the table to identify absolute and comparative advantages.
In this example, assume that after comparing production, we find Canada has an absolute advantage in lumber production and Venezuela in oil. The comparative advantage might differ; Canada might have a lower opportunity cost in lumber, and Venezuela in oil, suggesting each should specialize accordingly.