Absolute v. Comparative Advantage Two countries: Bolivia and Canada

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

Absolute advantage: The ability to produce something using fewer resources than other producers use CANADA BOLIVIA HOURS OF LABOR NEEDED TO PRODUCE 1 1 Sweater 5 hrs 8 hrs 1 Chair 20 hrs 24 hrs Canada has absolute advantage in producing sweaters Canada has absolute advantage in producing chairs

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

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?

Determining comparative advantage CANADA BOLIVIA Cost of producing 1 chair in terms of sweaters 1 Chair 4 sweaters 3 sweaters Bolivia has comparative advantage in producing chairs because it would mean having to give up fewer sweaters

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

Opportunity cost of 1 sweater CANADA BOLIVIA Cost of producing 1 sweater in terms of chairs 1 Sweater ¼ chair 1/3 chair Canada has comparative advantage in producing sweaters because it would mean having to give up fewer chairs

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