You will study about absolute advantage and comparative advantage in basic Economics.
While the application of this concept is usually in international trade, you will find that the concept of absolute advantage and comparative advantage is useful in your life.
Let us find out what is the difference between absolute advantage and comparative advantage. We will discuss the application of the concept on a personal level later.
What is absolute advantage?
Absolute advantage refers to the fact that Country A can make more quantity of a good than Country B. That is provided they have the same amount of resource.
For example, Country A can make40 widgets in an hour. Country B can make 20 widgets in an hour. In this case, Country A has absolute advantage over Country B.
Some countries, by virtue of geographical location and natural resources, have absolute advantage over other countries.
That is why certain countries are famous for the production of certain commodities, such as sugar, oil, coffee and the rest.
What is comparative advantage?
Comparative advantage takes into consideration the opportunity cost.
For example, Country A can make 40 widgets in an hour. Country A can also produce 400 chips in an hour.
Country B can make 20 widgets in an hour. Country B can also produce 60 chips in an hour.
If Country A decides to make widgets, it cannot produce chips at the same time. The opportunity cost of making 40 widgets is to forego the chance of producing 400 chips.
While Country A has absolute advantage in both items, it does not have the resources to make both items. That is when the concept of comparative advantage comes into play.
Since the opportunity cost of one widget is ten chips. Country A does not have comparative advantage to make widgets.
Country A can concentrate on making chips.
On the other hand, Country B has a comparative advantage in
If country A makes chips, and Country B makes widgets, they will produce 20 widgets and 400 chips in an hour.
They can trade with each other, so that each country has enough widgets and chips.
How does the concept of absolute advantage and comparative advantage apply to you?
You know that you have only 24 hours a day. You cannot realistically do everything. That is when you consider the concept of absolute advantage and comparative advantage.
Let us assume that you can earn $200 per hour from your employment. Let us also assume that you need 6 hours a week to do house cleaning.
That means if you choose to do the house cleaning, you will lose the opportunity to earn $1,200.
If you hire a person to do house cleaning, she takes 10 hours to complete the task. You need to pay her $10 per hour.
While you have absolute advantage in both employment and house cleaning, you do not have comparative advantage when it comes to house cleaning.
You will forfeit the chance to earn $1,200 if you do your own house cleaning. However, you need to pay the person $100 for the 10 hours of work. She has a comparative advantage.
The rich people know the concept of absolute advantage and comparative advantage very well. That is why they hire people to do work for them.