Can anyone explain me clearly and with simple numerical examples of what is absolute advantage and comparative advantage difference? I am a commerce student and currently learning, absolute advantage and comparative advantage difference.
absolute advantage and comparative advantage difference with numerical example
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Sunidhi Gupta
Absolute Advantage – Absolute Advantage is a term used in Economics which means the advantage or superiority of any party over the other party in producing goods and services of any kind in a large quantity with using lesser inputs and in less period of time i.e. producing in efficient manner.
For Example – Ram produces 5 units of barley in 3 hours and Mohan produces 3 units of barley in the same number of hours. Then total production by Ram in 3 hours = 5×3 =15units and total production by Mohan in 3 hours = 3×3 = 9units .
As Ram produces more barley than Mohan in same number of hours, then, we can say that Ram has an Absolute Advantage over Mohan.
Comparative Advantage – This is the term which is used when Opportunity cost is taken as a factor in choosing the different production options. A party is said to have a comparative advantage over the other party when it has lower opportunity cost as compared to the other one. It also means choosing the best without giving up the least
For Example – Alia produces 1 unit of sugarcane in 3 hours and 1 unit of rice in same time whereas Neha produces 2 units of sugarcane in 3 hours and 3 units of rice in 3 hours.
Total production of Sugarcane by Alia = 1×3 = 3units
Total production of rice by Alia = 1×3= 3units
3 units of sugarcane = 3 units of rice
So opportunity cost of 1 unit of sugarcane is 1 unit of rice.
Total production of sugarcane by Neha = 2×3 = 6units
Total production of rice by neha = 3×3 =9units
6 units of sugarcane = 9 units of rice
So opportunity cost of 1 unit of Sugarcane is equal to 3/2 units of Rice.
As opportunity cost is lower (wheat) in case of Alia so Alia has a Comparative Advantage over Neha.