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Stats: 17,991 Members, 73,296 Topics, 15,958 Comments. Date: Sep 21 2019, 8:14 pm

QUESTION: Distinguish Between Absolute Advantage Theory And Comparative Advantage Theory With An Example [Solved]

Nigeria Student Forum / Questions / Marketing Department / Distinguish Between Absolute Advantage Theory And Comparative Advantage Theory With An Example

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Adelani Temiloluwa
School Of Nursing Ondo
Nursing Student
300Level, Nigeria.

Absolute vs. Comparative
Absolute advantage and comparative advantage are two important concepts in economics and international trade. They largely influence how and why nations and businesses devote resources to the production of particular goods.

In isolation, absolute advantage describes a scenario in which one entity can manufacture a product at a higher quality and a faster rate for a greater profit than another competing business or country can accomplish. Comparative advantage differs in that it takes into consideration the opportunity costs involved when choosing to manufacture multiple types of goods with limited resources.

Absolute Advantage
The differentiation between the varying abilities of companies and nations to produce goods efficiently is the basis for the concept of absolute advantage. Absolute advantage looks at the efficiency of producing a single product. This analysis helps countries avoid the production of products that would yield little or no demand, leading to losses. A country’s absolute advantage, or disadvantage, in a particular industry, can play an important role in the types of goods it chooses to produce.

As an example, if Japan and Italy can both produce automobiles, but Italy can produce sports cars of a higher quality and at a faster rate with greater profit, then Italy is said to have an absolute advantage in that particular industry. In this example, Japan may be better served to devote the limited resources and manpower to another industry or other types of vehicles, such as electric cars, in which it may enjoy an absolute advantage, rather than trying to compete with Italy's efficiency.

Comparative Advantage
Comparative advantage takes a more holistic view, with the perspective that a country or business has the resources to produce a variety of goods. The opportunity cost of a given option is equal to the forfeited benefits that could have been achieved by choosing an available alternative in comparison. In general, when the profit from two products is identified, analysts would calculate the opportunity cost of choosing one option over the other.

For example, assume that China has enough resources to produce either smartphones or computers. China can produce 10 computers or 10 smartphones. Computers generate a higher profit. Therefore, the opportunity cost is the difference in value lost from producing a smartphone rather than a computer. If China earns $100 for a computer and $50 for a smartphone then the opportunity cost is $50. If China has to choose between producing computers over smartphones it will select computers.

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