Comparative Advantage & Trade

1.

Comparative Advantage & Trade

2.

Absolute & Comparative Advantage
Market Goods / h
Home Goods / h
Alma
10
5
Adil
8
2
Alma & Adil have 12 hours a
day that they can spend either
making market goods or home
goods.
They're better off combining
their resources than working
separately.
First of all, we will see what
each of them can produce
separately.
Then we combine their PPF to
see what they can do together.
Alma’s Absolute advantage both in HG & MG
And once they combine the
effort, Alma can be outside her
PPF, while Adil is still on his
PPF.
2

3.

Absolute advantage definition
Alma can produce more HG / hour and more MG /
hour.
It means that Alma has the absolute advantage in
producing both goods.
A person or country or firm has an absolute
advantage, if they can produce more per unit of
input.
3

4.

Separate PPFs
Market Goods
Adil
Alma
Home goods
Alma
10
5
Adil
8
2
Mkt goods
Mkt goods
96 = 8 * 12
120 = 10 * 12
If Alma spends all her the time
(12 h) on market goods, then
she can produce 120 units of
market goods (MG).
If she spends 12h on home
goods (HG) she can produce
60 units of HG.
Home goods
60 = 5 * 12
Home goods
The same applies to Adil.
24 = 2 * 12
4

5.

Separate PPFs
Market Goods / h
Adil
Alma
Alma
10
5
Adil
8
2
Adil wants exactly 10 units of HG.
Mkt goods
Mkt goods
96 = 8 * 12
120 = 10 * 12