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A numerical example of absolute and comparative advantage

Consider a hypothetical world with two countries, Saudi Arabia and the United States, and two products, oil and corn. Further assume that consumers in both countries desire both these goods. These goods are homogeneous, meaning that consumers/producers cannot differentiate between corn or oil from either country. There is only one resource available in both countries, labor hours. Saudi Arabia can produce oil with fewer resources, while the United States can produce corn with fewer resources. [link] illustrates the advantages of the two countries, expressed in terms of how many hours it takes to produce one unit of each good.

How many hours it takes to produce oil and corn
Country Oil (hours per barrel) Corn (hours per bushel)
Saudi Arabia 1 4
United States 2 1

In [link] , Saudi Arabia has an absolute advantage in the production of oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States. The United States has an absolute advantage in the production of corn.

To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see [link] ). We illustrate what each country is capable of producing on its own using a production possibility frontier (PPF) graph, shown in [link] . Recall from Choice in a World of Scarcity that the production possibilities frontier shows the maximum amount that each country can produce given its limited resources, in this case workers, and its level of technology.

Production possibilities before trade
Country Oil Production using 100 worker hours (barrels) Corn Production using 100 worker hours (bushels)
Saudi Arabia 100 or 25
United States 50 or 100

Production possibilities frontiers

These graphs illustrate the production possibilities frontier before trade for both Saudi Arabia and the United States using the data in the table titled “Production Possibilities before Trade”. The x-axis plots corn production, measured by bushels, and the y-axis plots oil, in terms of barrels. All points above the frontier are impossible to produce given the current level of resources and technology.
(a) Saudi Arabia can produce 100 barrels of oil at maximum and zero corn (point A), or 25 bushels of corn and zero oil (point B). It can also produce other combinations of oil and corn if it wants to consume both goods, such as at point C. Here it chooses to produce/consume 60 barrels of oil, leaving 40 work hours that can be allocated to producing 10 bushels of corn, using the data in [link] . (b) If the United States produces only oil, it can produce, at maximum, 50 barrels and zero corn (point A'), or at the other extreme, it can produce a maximum of 100 bushels of corn and no oil (point B'). Other combinations of both oil and corn are possible, such as point C'. All points above the frontiers are impossible to produce given the current level of resources and technology.

Arguably Saudi and U.S. consumers desire both oil and corn to live. Let’s say that before trade occurs, both countries produce and consume at point C or C'. Thus, before trade, the Saudi Arabian economy will devote 60 worker hours to produce oil, as shown in [link] . Given the information in [link] , this choice implies that it produces/consumes 60 barrels of oil. With the remaining 40 worker hours, since it needs four hours to produce a bushel of corn, it can produce only 10 bushels. To be at point C', the U.S. economy devotes 40 worker hours to produce 20 barrels of oil and the remaining worker hours can be allocated to produce 60 bushels of corn.

Questions & Answers

What is demand?
Annonymous Reply
why is degree important in economics
Ebunoluwa Reply
important of enocomic
Adu Reply
what is division of labour
Dennis Reply
division of labour can be defined as the separation of task to individuals in any economic system to specialize on it.
Ahmad
what is demand curve
Victoria Reply
demand curve is a downward sloping economic graph that shows the relationship between the price of product and the quantity of the product demanded.
Ahmad
What is demand
Frank Reply
It refers to the quantity of a commodity purchased in the market at a price and at a point of time.
Basanta
refers to amount of commodities a consumer is willing and able to buy at particular price within a period of time
Clifford
It is the ability and willingness a customer buys a product or service at a particular price, place and time while other things remaining constant or the same
kum
In which case is opportunity cost is zero
Francis Reply
where no alternative is available
Bhartendu
who is the father of economic
Omar Reply
Adam Smith
Suraj
ok
Tony
Adam Smith
Francis
Adam smith
Opana
Adam Smith
Basanta
What is monopoly
Mauthoor Reply
it an economic situation where one individual controls the essential commodities or value product for maximum profit
James
monopoly is a market situation in which there is only one producer of a good or service which has no close substitutes
eliano
is where only one person is solely the price taker
Francis
what is Monopoly
Dauda Reply
The word Monopoly is a Latin word. it is the combination of two words-Mono means single and Poly means seller. thus Monopoly means single seller. but this is not the full meaning of Monopoly. Monopoly must produce a product which does not have close substitute in the market.
Basanta
Monopoly is define as a firm in an industry with very high barriers to entry.
Favour
If close substitute is available, Monopoly will be a king without a crown.
Basanta
what does it array
Cbdishakur Reply
what are the differences between monopoly and.oligopoly
Onome Reply
what are the difference between monopoly and oligopoly
Cbdishakur
The deference between Monopoly and Oligopoly: Monopoly means:A single-firm-Industry producing and selling a product having no close business and Oligopoly means:A market structure where a few sellers compete with each other and each controls a significant portion of market .
Basanta
so that the price-output policy one affects the other.
Basanta
what are difference between physical policy and monotory policy
hon
what is economic
Emakpor Reply
what is economic
Cbdishakur
the word economic was derived from the Greek word oikos (a house)and mein(to manage) which in effect meant managing a household with the limited funds available 🙂.
Basanta
good excample about scarsity
hon
An Enquiry into the nature and causes of wealth Nations, this book clearly defined what economic is🙂🙂🙏🙏 thank you...
Basanta
good example about scarcity: money,time, energy, human or natural resources. Scarcity of resources implies that there supply is very much limited in relation to demand.
Basanta
equilibrium is a situation in which economic forces such as demand and supply are balanced and in the absence of external influences,the value of economic variables will not change
Onome Reply
hmnn
Emakpor
marginal cost and marginal revenue is equilibrium .
Kho
yessss
Basanta
what is equilibrium
Rodrice Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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