Absolute Advantage
Absolute advantage is the ability of an entity to manufacture a product of a higher quality and at a faster rate for higher returns than other competing entities, which means it can produce goods with the lower marginal costs. Absolute advantage is concerned with the cost of efficiently producing a single product and is achieved through low cost of production.
In the production of lumber products from the table below, Canada has an absolute advantage over the USA which can be attributed to the fact that vast stretches of Canada are still mostly undeveloped, whereas relatively fewer areas in the United States remain undeveloped and the fact that the Canadian provincial forestry policies subsidize lumber production.
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The U.S. lumber industry generates annual revenue of about $240 billion with a payroll of $46 billion. (returns rate of 5.2%) while in Canada about $65.234 billions are made on a salary of $9.925 billion. (returns rate of 6.572%). In the production of beef, USA has an absolute advantage over Canada.research shows that the U.S. beef industry is more than seven times larger than Canada's in terms of cow numbers. The U.S. beef industry generates annual revenue of about $1.02 trillion with a yearly payroll of $46 billion yearly (returns rate of 3.968%) while in Canada about $8.9 billions are made on a payroll of $2.9 billion yearly (returns rate of 3.06%) (Porter, 2008) .The US has an absolute advantage in beef and Canada in lumber
LABOR REQUIREMENTS PER UNIT OF OUTPUT | ||
| United States | CANADA | |
| LUMBER | 1.264 | 1 |
| BEEF | 1 | 1.293 |
| Absolute advantage calculation | (1.264+1)/1=2.264 | (1.293+1)/1=2.293 |
Comparative Advantage
Comparative advantage occurs when an entity can produce a product at a lower opportunity cost than other entities due to availability of a cheap source of materials.if a country has to give out a lot to manufacture a specific product, it should give up and import it from the country that has readily available sources of materials. It is calculated as opportunity cost.
From the table, one person is required to manufacture one unit of lumber for Canada while for the USA, one person is never enough to manufacture one unit of lumber. Again from the table, one person is enough to manufacture one unit of beef in the USA, while in Canada, one person is never enough to manufacture one unit of beef.again from the table. The US has a comparative advantage in Beef and Canada in lumber. Therefore The US should import lumber and Canada should import beef.
Reference
Porter, M. E. (2008). Competitive Advantage: Creating and Sustaining Superior Performance . New York, NY: Simon & Schuster.
