Microeconomic principles: Absolute and comparative advantage

In the preceding lesson, you were careful to avoid the colloquial usage of precise economic terms. 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 as you prepare for the final exam. 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, such as in this subunit, 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. In this problem 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!