comparative advantage

Examples of comparative advantage in the following topics:

• Absolute Advantage Versus Comparative Advantage

  • Absolute advantage refers to differences in productivity of nations, while comparative advantage refers to differences in opportunity costs.
  • Absolute advantage compares the productivity of different producers or economies.
  • Even if one country has an absolute advantage in producing all goods, different countries could still have different comparative advantages.
  • Absolute advantage is important, but comparative advantage is what determines what a country will specialize in.
  • Country A has an absolute advantage in making both food and clothing, but a comparative advantage only in food.

• Defining Comparative Advantage

  • However, the accompanying table shows that Chiplandia has a comparative advantage in computer chip production, while Entertainia has a comparative advantage in the production of CD players.
  • It is important to distinguish between comparative advantage and competitive advantage.
  • Unlike comparative advantage, competitive advantage refers to a distinguishing attribute of a company or a product.
  • In the context of international trade, we more often discuss comparative advantage.
  • Chiplandia has a comparative advantage in producing computer chips, while Entertainia has a comparative advantage in producing CD players.

• Relationship Between Specialization and Trade

  • The traders decide on whether they should export or import goods depending on comparative advantages.
  • Rather than absolute advantage, comparative advantage is the driving force of specialization.
  • In sum, the producer that has a smaller opportunity cost will have the comparative advantage.
  • It follows that Bob will have a comparative advantage in the production of mustard.
  • Tom has the comparative advantage in producing ketchup, while Bob has the comparative advantage in producing mustard.

• Reasons for Trade

  • Countries benefit when they specialize in producing goods for which they have a comparative advantage and engage in trade for other goods.
  • Trading-partners reap mutual gains when each nation specializes in goods for which it holds a comparative advantage and then engages in trade for other products.
  • In other words, each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations .
  • Countries benefit from producing goods in which they have comparative advantage and trading them for goods in which other countries have the comparative advantage.

• Competitive Advantage

  • Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry.
  • Competitive advantage seeks to address some of the criticisms of comparative advantage.
  • A country is said to have a comparative advantage in the production of a good (say cloth) if it can produce cloth at a lower opportunity cost than another country.
  • Thus, England would have the comparative advantage in cloth production relative to Portugal if it must give up less wine to produce another unit of cloth than the amount of wine that Portugal would have to give up to produce another unit of cloth.
  • The other theory, comparative advantage, can lead countries to specialize in exporting primary goods and raw materials that trap countries in low-wage economies due to terms of trade.

• Defining Absolute Advantage

  • A country has an absolute advantage in the production of a good when it can produce it more efficiently than other countries.
  • Absolute advantage refers to the ability of a country to produce a good more efficiently that other countries.
  • Absolute advantage differs from comparative advantage, which refers to the ability of a country to produce specific goods at a lower opportunity cost.
  • A country with an absolute advantage can sell the good for less than a country that does not have the absolute advantage.
  • Party B has an absolute advantage in producing widgets.

• Absolute Advantage and the Balance of Trade

  • Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations.
  • Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations .
  • Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.
  • Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party.
  • It can be contrasted with the concept of comparative advantage, which refers to the ability to produce a particular good at a lower opportunity cost.

• Advantages of the NPV method

  • Another advantage of the NPV method is that it allows for easy comparisons of potential investments.
  • As long as the NPV of all options are taken at the same point in time, the investor can compare the magnitude of each option.
  • It's easy of use in decision making is one of its advantages.
  • Describe the advantages of using net present value to evaluate potential investments

• Advantages of the IRR Method

  • The IRR method is easily understood, it recognizes the time value of money, and compared to the NPV method is an indicator of efficiency.
  • The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in capital budgeting to measure and compare the profitability of investment.
  • One advantage of the IRR method is that it is very clear and easy to understand.
  • Compared to payback period method, IRR takes into account the time value of money.
  • Describe the advantages of using the internal rate of return over other types of capital budgeting methods

• Advantages of fuel cells

  • 70%–85% of the energy obtained from the fuel in a fuel cell can be converted into power and heat compared to coal or oil, which is around 35%.
  • Since fuel cells are smaller than coal-fired furnaces, less land is required to set them up as compared to traditional power plants.