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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 want, cost,
Muhammad Reply
in what ways is monopolist competition different from perfect competition
Juliana Reply
what is economics
Lizzy Reply
is the study of how you can make your own business to develop yourself and even the other countries
Abdifatah
the study of economic enable us to practice how to manage and arranged our daily basic of life.
Jonathan
Economics is a science that studies human behaviour as a relationship between ends and scarce means. .
Dan
Am I totally agree the scare means are the wants and beings the humans need
Anastassiya
simple meaning.....Demand and Supply
Pranav
economics is science and art economics means , branch of that knowledge which teach of economic nature
RAJESH
Expalin why demand curve for a perfectly competitive firm is perfectly elastic and eams normal profit in the long run
Abdi Reply
how does elasticity helps in our daily lives
Chris Reply
it help me a lot, in search for slipper I can purchase shoe, in such for car I can purchase bike it helps a lot to everyone in the world.
Jonathan
List and explain four factors of production
Vuyo Reply
capital labour entrepreneur natural resources
Thembi
land labour entrepreneur capital
Ebrima
What is supply
Ogodo Reply
when the supply decreases demand also decreases
Thembi
supply is the quantity of good and services a producer is willing to supply to the market for sale at a particular price
Ebrima
when supply decrease daman is high
Dorcas
supply is the quantity of goods and services which willing to supply to market to sale a particular price
Dorcas
types of demand and the explanation
akin Reply
what is demand
akin Reply
other things remaining same if demend is increases supply is also decrease and if demend is decrease supply is also increases is called the demand
Mian
if the demand increase supply also increases
Thembi
you are wrong this is the law of demand and not the definition
Tarasum
Demand is the willingness of buy and ability to buy in a specific time period in specific place. Mian you are saying law of demand but not in proper way. you have to keep studying more. because its very basic things in Economics.
Hamza
Demand is the price of Quantity goods and services in which consumer's are willing and able to offer at a price in the market over a period of time
Umar
Demand is the quantity of goods and services that the consumer are willing and able to buy at a alternative prices over a given period of time. But mind you demand is quite different from need and want.
Tarasum
Demand can be defined as the graphical representation between price&demand
alkasim
sorry demand is nt a graphical representation between price and quantity demand but instead that is demand curve.
Ebrima
Demand is the willingness and ability of a consumer to buy a quantity of a good over a given period of time assuming all other things remain constant.
Vedaant
Demand is define as the good's and services,that a consumer is willing and able to purchase at a particular period of time.
Jonathan
what is commercialization?
Doris Reply
commercial is the process of changing non profit orientating organisation to profit orientating organisation.
Ebrima
How to talk loan for bank?
Alfred Reply
what is the meaning of gpa?
Ritisha Reply
Answer: GPA stands for Grade Point Average. It is a standard way of measuring academic achievement in the U.S. Basically, it goes as follows: Each course is given a certain number of "units" or "credits", depending on the content of the course.
Yusuf
what is small and Microbuisenes
tadesse Reply
What is fiscal policy
Dansofo
Who is the funder of Economic
Dansofo
founder , that is Adam Smith
Daniel
what is model
Daniel Reply
The wealth of Nations
Yusuf Reply
the wealth of nations, is it the first?
Umar
Yes very sure it was released in 1759
Yusuf
thank you Yusuf.
Umar
then when did he died?
Umar
17 July 1790 Born: 16 June 1723, Kirkcaldy, United Kingdom Place of death: Panmure House, Edinburgh, United Kingdom
Yusuf
1790
Yusuf
that's my today questions, thank you Yusuf it's bed time see u after.
Umar

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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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