1. Explain how absolute advantage and comparative advantage differ.
People face trade-offs when deciding what to produce and we call the things that are given up COST.
ABSOLUTE ADVANTAGE refers to the ability to produce a good using fewer inputs than another producer.
COMPARATIVE ADVANTAGE refers to the ability to produce a good at a lower opportunity cost than another producer.
Suppose out of a set of resources named X, one can produce A or B.
Absolute advantage considers absolute cost, which is the resources X.
Comparative advantage considers opportunity cost, which is B.
When people make decision about what to produce, it is not the absolute cost they take more consideration. Instead, they list all the possibilities and choose the one with more value and less opportunity cost. Thus, people choose the thing with comparative advantage to produce so that they give up the least.
2. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.
Suppose the CEO of a big company was once a good accountant; therefore he does better in accounting than the accountant of the company.
In this case, the CEO has an absolute advantage in accounting. Yet if he did the accounting work himself he would have to give up some management work which would bring him a large sum of money. The present accountant of the company, if giving up the job, cannot make such quantity of money. Therefore, the present accountant has a comparative advantage in accounting.
3. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 2.
Comparative advantage is more important for trade.
In the case in my answer to Question 2, the CEO won't do accounting work just because he can do it in less time than the present accountant because he can use the time to do something far more valuable. Using economic concepts to explain it, the CEO chooses not to do accounting work because he doesn't have a comparative advantage in it.
People compare, and choose the most valuable activity to do. One doesn't do a thing because he can do it faster than others. One does a thing because this is the best thing he can do; in other words, its opportunity cost is the lowest of all. In conclusion, people base their decisions on comparative advantage.
4. Will a nation tend to export or import goods for which it has a comparative advantage? Explain.
A nation tend to specialize in activities in which it has a comparative advantage. So a nation tend to export goods for which it has a comparative advantage.
5. Why do economists oppose policies that restricts trade among nations?
Because trade allows nations to specialize in activities in which they have a comparative advantage and makes them better off.
People face trade-offs when deciding what to produce and we call the things that are given up COST.
ABSOLUTE ADVANTAGE refers to the ability to produce a good using fewer inputs than another producer.
COMPARATIVE ADVANTAGE refers to the ability to produce a good at a lower opportunity cost than another producer.
Suppose out of a set of resources named X, one can produce A or B.
Absolute advantage considers absolute cost, which is the resources X.
Comparative advantage considers opportunity cost, which is B.
When people make decision about what to produce, it is not the absolute cost they take more consideration. Instead, they list all the possibilities and choose the one with more value and less opportunity cost. Thus, people choose the thing with comparative advantage to produce so that they give up the least.
2. Give an example in which one person has an absolute advantage in doing something but another person has a comparative advantage.
Suppose the CEO of a big company was once a good accountant; therefore he does better in accounting than the accountant of the company.
In this case, the CEO has an absolute advantage in accounting. Yet if he did the accounting work himself he would have to give up some management work which would bring him a large sum of money. The present accountant of the company, if giving up the job, cannot make such quantity of money. Therefore, the present accountant has a comparative advantage in accounting.
3. Is absolute advantage or comparative advantage more important for trade? Explain your reasoning using the example in your answer to Question 2.
Comparative advantage is more important for trade.
In the case in my answer to Question 2, the CEO won't do accounting work just because he can do it in less time than the present accountant because he can use the time to do something far more valuable. Using economic concepts to explain it, the CEO chooses not to do accounting work because he doesn't have a comparative advantage in it.
People compare, and choose the most valuable activity to do. One doesn't do a thing because he can do it faster than others. One does a thing because this is the best thing he can do; in other words, its opportunity cost is the lowest of all. In conclusion, people base their decisions on comparative advantage.
4. Will a nation tend to export or import goods for which it has a comparative advantage? Explain.
A nation tend to specialize in activities in which it has a comparative advantage. So a nation tend to export goods for which it has a comparative advantage.
5. Why do economists oppose policies that restricts trade among nations?
Because trade allows nations to specialize in activities in which they have a comparative advantage and makes them better off.
