Economics Production Possibility Frontier Questions Medium
Absolute advantage refers to the ability of a country, individual, or firm to produce a good or service more efficiently than another country, individual, or firm. It is determined by comparing the productivity levels of different entities in terms of the resources they use to produce a particular good or service. In other words, it measures the ability to produce more output with the same amount of resources or the ability to produce the same output with fewer resources.
Comparative advantage, on the other hand, refers to the ability of a country, individual, or firm to produce a good or service at a lower opportunity cost than another country, individual, or firm. It is determined by comparing the relative opportunity costs of producing different goods or services. Opportunity cost refers to the value of the next best alternative that is forgone when a choice is made.
While absolute advantage focuses on the overall efficiency of production, comparative advantage focuses on the opportunity cost of production. It suggests that even if a country, individual, or firm has an absolute disadvantage in producing all goods or services, it can still benefit from specializing in the production of goods or services in which it has a lower opportunity cost compared to other entities. This allows for mutually beneficial trade between entities with different comparative advantages, leading to increased overall production and efficiency.