Absolute Advantage Vs Comparative Advantage

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Introduction Comparative advantage refers to an economic theory that depicts the ability of an individual or a firm to produce services or goods at a lower opportunity cost in comparison to other competitors in the same industry. Firms that have the comparative advantage over others are associated with lower marginal costs before the commencement of trading. The aspect of comparative advantage enables manufacturers to sell their product at a lower cost in comparison with their rivals in the market thus resulting in higher profit margins due to increased sales. When establishing the comparative advantage, the monetary and resource costs are not compared. On the contrary, the opportunity costs of services and products across various agents are…show more content…
Absolute advantage results in increased productivity using fewer resources regarding labor as compared to other countries that also produce similar products or services. On the other hand, a country gains the comparative advantage over another through producing services or goods that have a lower opportunity cost as compared to anything else that the country could have done with its resources (Schumacher, 2012). Therefore, the cost factor is affiliated to absolute advantage whereas the opportunity cost factor is associated with comparative…show more content…
Take a model who makes $10,000 a day modeling but who is also very efficient at mowing her large yard around her mansion. If she cuts her grass herself, she can do it in one day. Or she can hire a lawn service that takes 2 days to mow the lawn and charges $400. Thus, the model has an absolute advantage in both working as a model and mowing her own lawn, but, she would, nonetheless, still hire the lawn service, because if she mowed her own lawn, she would have to give up a day of modeling, which means her earnings would be $10,000 less. By hiring the lawn service, she earns $10,000 a day as a model and pays the lawn service $400, for a net gain of $9,600. Hence, the $9,600 is her opportunity cost for mowing her own lawn. If the lawn service does not mow the model 's lawn, then it will not get the $400 that it charges the model, but it will have time to mow other people 's lawns for the same amount of money. Therefore, the lawn service 's maximum opportunity cost of not mowing the model 's lawn is only $400, which gives it a comparative advantage over the model. Because countries differ in their absolute or comparative advantage in producing specific products or services, the world benefits by allowing free trade. However, trade is often restricted on the specious grounds of preserving jobs or because politically powerful people want to increase their wealth at the expense of the
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