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Absolute v. Comparative Advantage

Explore the concepts of absolute and comparative advantage in the production of chairs and sweaters in Bolivia and Canada. Learn about the determination of comparative advantage based on opportunity costs and the law of comparative advantage according to David Ricardo.

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Absolute v. Comparative Advantage

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  1. Absolute v. Comparative Advantage Two countries: Bolivia and Canada

  2. Goods • Two goods: Chairs and Sweaters • One resource: hours of labor

  3. Absolute advantage: The ability to produce something using fewer resources than other producers use • Canada has absolute advantage in producing sweaters • Canada has absolute advantage in producing chairs

  4. Comparative Advantage The ability to produce something at a lower opportunity cost than other producers face

  5. Determining comparative advantage • How much does it cost to produce 1 chair? • The cost will be in terms of sweaters that could have been produced in the same amount of time as 1 chair • For Bolivia, how many sweaters could have been produced in 24 hours? • For Canada, how many sweaters could have been produced in 20 hours?

  6. Determining comparative advantage • Bolivia has comparative advantage in producing chairs because it would mean having to give up fewer sweaters

  7. Determining comparative advantage • How much does it cost to produce 1 sweater? • The cost will be in terms of (fraction of) a chair that could have been produced in the same amount of time as 1 sweater

  8. Opportunity cost of 1 sweater • Canada has comparative advantage in producing sweaters because it would mean having to give up fewer chairs

  9. Law of comparative advantage • The individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that good. David Ricardo 1772-1823

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