Y13 Booklet 5: Absolute & Comparative Advantages

Question 1

What is absolute advantage? How is this shown on a PPF?

Answer 1

when a country is more technically efficient than another, at producing a certain product

Mexico has abs. advantage in avocados Italy has abs. advantage in olive oil

Question 2

What is comparative advantage? How is this shown on a PPF?

Answer 2

when a country can produce at a lower opportunity cost than another, for a certain product

A has comp. advantage in wheat B has comp. advantage in pulses

Question 3

What is technical efficiency?

Answer 3

when a country can produce a higher output, with given factors of production

Question 4

How to calculate comparative advantage?

Answer 4

1) create a table, with countries in columns and opportunity cost in rows (see example)
2) calculate opp. costs (units of product produced / units of product given up)
3) select country with lowest opp. cost for each product

Question 5

How do the theories of advantages benefit countries?

Answer 5

countries specialise to produce more products across both countries, and trade to a Pareto optimum to maximise consumer welfare

Question 6

What are the assumptions of the theories of advantages, which can be questioned to evaluate them?

Answer 6

• double coincidence of wants, for trading
• fixed factor endowments
• immobility of factors of production
• constant returns to scale
• price/cost stability

Question 7

What are the sources of comparative advantage?

Answer 7

• capital stock & innovation
• climate & natural resources
• demographics & human capital
• institutional framework (e.g. regulation, or lack thereof)