Economic models
The production possibility frontier
Comparative advantage vs. absolute advantage
This model is an application of the production possibility frontier studied in the previous section, albeit in a global set-up. In this subunit, we will bring the argument for international trade, specialization, comparative advantage, and the resulting economic growth to light. The mechanics of comparative advantage will reveal why it would benefit a country to import goods it produces at home.
Analyzing advantage
Absolute and comparative advantage is a difficult topic, challenging you to use analytical reasoning to explore what absolute advantage and comparative advantage actually mean, what opportunity costs are, and the real choices that national economies have to make.
The statements "I absolutely have an advantage" and "I have an absolute advantage" have very different meanings. Likewise, consider how an economist might think differently about the statements, "Compared to me you have an advantage" and "I have a comparative advantage in producing food." For economists, the word "compare" is different in meaning from "comparative", especially when discussing advantage.
Keep these definitions handy. To define an absolute advantage among paired countries you need:
- two producers,
- one product, and
- equal access to equivalent "inputs."
To define a comparative advantage among paired countires, you need:
- two producers,
- two products, and
- the "price" of one product in terms of the other.
The opportunity cost of each product ought to be expressed in terms of how much of the other product is given up to produce it. You will note there is no mention of this value in terms of a currency, like the dollar, or talk about costs other than in terms of amount of input used or amount of input given up. We're not quite at the point where we're talking about money or profit.
Time, however, is always a variable in all economic considerations. Early in your exploration of economics, the best way to understaind things, bit-by-bit, is to keep time constant for now. Time is not an input. Labor is; materials are; but time is not. One last assumption requires clarification. We assumed that all available resources are dedicated to producing either food or clothing. There is no excess capacity! And to make the math easier we also assumed that their production frontiers are limited. As your study of economics continues, you will encounter ideas which complicate those assumptions!
