# Theory of Comparative Advantage

#1

Does anyone mind explaining this to me? I have an exam for my International Business Course and I can not quite comprehend this.

Here's what my notes say.

A nation may have absolute disadvantages in the production of two goods with respect to another nation

Yet this nation has a comparative advantage or relative advantage in the production of the good in which its absolute disadvantage is lower

By specializing in the production of the good in which the country has lower comparative disadvantage, and importing other goods, the total goods available will increase

absolute advantage means that a nation can produce more of a service or good than another nation with less input (land, labor, capital).

#2

because one nation, with the absolute advantage, would be better off producing the item which it has the greatest absolute advantage. If it produced the lesser of its two goods, it would actually be missing out on the opportunity to produce said first good. Therefore the second shitty country does not suffer a penalty by producing the second good since it would have been unable to compete with the first country on the first good anyways. comprehende

#3

fuckkkk me.

#4

You have Nations A and B. The goods in question are C and D.

If A is more efficient and better at producing good C than Nation B, but Nation B is better at producing good D than C, then Nation B has a comparative advantage in producing good D. Comparative advantage, because it is only in relation to good C. This means it has a lower comparative disadvantage in producing good D.

In consequence, nation B should let nation A go apeshit in producing good C as it doesn't stand any chance in competing. This consumes resources (time, labour, materials) and allows nation B to benefit by producing good D.

If it's easier, think of it in relation to the 80:20 rule.

#5

It may be simplier if you put some numbers behind it.

Widgets sell for \$100/widget
Knobs sell for \$100/knob

Assume input resources/time are the same for widgets and knobs.

Country A can produce widgets for \$40/widget --> profit \$60/widget
Country B can produce widgets for \$60/widget --> profit \$40/widget

Country A can produce knobs for \$60/knob --> profit \$40/knob
Country B can produce knobs for \$65/knob --> profit \$35/knob

In either case Country A has an absolute advantage and can outperform Country B. So at first you would assume that Country A should outproduce Country B in the production of both widgets and knobs and control both markets.

However, if Country A focuses on production of widgets and imports knobs from Country B then Country A will maximize it's profit.

Likewise, even though widgets are more profitable for Country B, they can't compete with Country A and are better served focusing on the secondary market of knobs.

Hope that helps.

#6

Ronnie Coleman is a both a better police officer and a better bodybuilder than you. He possesses an absolute advantage in both policing and bodybuilding. But he's better at bodybuilding than policing because... yeah buddy.

You suck at both, in comparison. In comparison, you probably fail at life, and should be smacked around just for trying to exist. But you're a better police officer than bodybuilder.

In this instance, the utility of society will be maximized if Ronnie stickes to bodybuilding, and you do policeman stuff, instead of him trying to split his time doing both even though he's awesome at it, because every moment he spends issuing traffic tickets is time he could be spending lifting, eating, and recovering. So rather than lose precious time lifting 'nothing but a peanut', its best if you be the copper. You're not quite as good at it, but you doing it allows Ronnie to focus on doing what he does best.

This is how you can have a comparative advantage police-officer-ing, even when Ronnie is totally better at it than you.

C'mon guys, it's a bodybuilding forum.

Also, if the above is deemed offensive, sub 'me' for 'you' and it won't seem so harsh.

#7

I guess you meat heads aren't so dumb after all. kidding.

thanks a lot guys. much appreciated.

#8

QFLULZ.

#9

haha full of win.

#10

this

#11

I'll eat you for a snack, '10 bitch!

#12

econ major i assume? i still cringe every time i hear widget because it was all i hear for 4 years straight.

#13

Not sure why some Econ teachers make the subject so boring. I prefer my widget to be referred to as Craft Beer and my knob to be meat lover's pizza and wings.