Define absolute and comparative advantage
Absolute advantage is a business term that identifies producers who require few resources to produce more products. On the other hand, comparative advantage defines the ability of a team to produce products or services at a lower cost.
Compare the two views on trade
In the international market, absolute and comparative advantages are considered significant features. The two features influence and determine how countries use few resources to acquire products and services. Absolute and comparative advantages provide a straightforward platform to international business since they have complex features.
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In absolute advantage, nations can produce services and products. The absolute advantage of countries is based on the type of businesses the state chooses to engage in. For example, a country may focus its resources and workforce to another filed which offers an absolute advantage. The comparative advantage showcases the resources used to produce goods between two countries. With a specific time frame, the comparative advantage also displays the overall creation of products. In this case, comparative advantage is concerned with limited goods.
How does the concept of opportunity cost factor into a comparative advantage?
Comparative advantage is mainly focused on the concept of opportunity cost. The opportunity cost of a product is based on the benefits gained by a country. In this case, comparative advantage takes place when the opportunity cost of a product is considered to be low for the country. A good example is China’s comparative advantage which is deemed to be cheap labor in the United States. Most of the Chinese industries are considered to produce cheap consumer goods at a low opportunity cost. On the other hand, the Americans produce refined goods and opportunities at a low opportunity cost.
Discuss why you think comparative advantage has become the fundamental and accepted theory of trade. Provide concrete examples.
Comparative advantage has become the fundamental and accepted theory because all states involved end up benefiting from the resources. For example, United States may produce sweets at $1 while China is producing popsicles at $2. When the two countries sign an agreement, both end up producing their products at lower costs. This factor showcases how the two countries can trade since they produce items at a lower price. Therefore, the United States and China are willing to trade their products at low costs.
