Question

What is the difference between comparative advantage and absolute advantage?

Comparative advantage measures opportunity cost and absolute advantage measures efficiency.
Absolute advantage measures opportunity cost and comparative advantage measures production cost.
Comparative advantage measures sale price and absolute advantage measures production cost.
Absolute advantage measures sale price and absolute advantage measures production cost.

Answer 1

Correct answer: 1) Comparative advantage measures opportunity cost and absolute advantage measures efficiency.

Brief explanation:
- Absolute advantage: who can produce more of a good with the same resources (or produce the same amount with fewer resources) — a measure of productivity/efficiency.
- Comparative advantage: who has the lower opportunity cost of producing a good — the basis for specialization and mutually beneficial trade, even if one party has no absolute advantage.

Example (numbers):
- Country A: 100 cars or 50 computers — opportunity cost of 1 computer = 2 cars.
- Country B: 60 cars or 40 computers — opportunity cost of 1 computer = 1.5 cars.
A has an absolute advantage in both goods (100>60 and 50>40), but B has the comparative advantage in computers (lower opportunity cost), so B should specialize in computers and A in cars.