Florida State College at Jacksonville
Absolute vs. Comparative Advantage
There are two types of advantages we are looking at in this video. Absolute and comparative advantage are terms most widely used in international trading. Absolute advantage is a situation in business where a provider of goods or services are more profitable than the competitions, by having less total input per unit of output. Comparative advantage is the ability of a group or individual to fulfill an economic activity at less cost more efficiently. The first question to answer is which international trade components can be identified in the video? Secondly, what is opportunity cost? Third, what is the theory of comparative advantage? Lastly is, how might a company engaged in international business act on the information contained in the video?
Absolute and comparative advantage both deal with production, goods, and services. Absolute advantage is a condition where the trade is not commonly advantageous, comparative advantage is a condition where there is commonly advantageous trade. Comparative advantage generally compares between two countries the output of production of the same type of good or service. When a country produces the highest amount of goods over another country after the same resources are given to both countries this is called an absolute advantage. Comparative advantage looks at the production of services and goods within a time frame. Absolute advantage is looks more into multiple goods. Cost is involved in absolute advantage. Opportunity cost is involved in comparative advantage. Comparative advantage is forever reciprocal and mutual. These are some of the differences between the two advantages. As for in this video the international trade components that can be identified are costs, opportunity costs, productivity, and outsourcing. (Maranjian, 2013)
What is opportunity cost exactly? Looking into this video we see opportunity cost is simply what is given up to in order do something. For example, imagine if you wanted to become a fireman or a doctor. If you choose to be a fireman, you give up the chance of being a doctor and everything that goes along with it. That is an opportunity cost of becoming a fireman. Also, opportunity cost is defined as the highest-value opportunity forgone. For example, say you could have become a doctor, making $300,000 per year, instead of a fireman earning $46,000. The opportunity cost, salary wise, is $254,000. Opportunity cost can assist you in thinking about your finances and investing decisions in a rational manor. For example, you want to buy a new computer for $1,000. Yes it costs a $1,000, however there are opportunity costs as well. If you were to invest that money in the stock market and it were over the next three years averaged a 10 percent growth rate, you would end up with more than what you invested. So if you buy the new computer you are giving up the opportunity to make more money. This is known as comparative advantage. When the same concepts are applied to the world economy, we see that some countries have an absolute advantage at good production. This is because resources are usually different in other countries. One country may have an abundance of fruit, while another is rich in oil. Absolute advantage is created when resources differ. If everyone was to export what they are good at, then many countries would be better off due to the fact that they would be able to produce and sell more. They would also have accessibility to more goods and services that some other countries are producing better than they do. It is vital to understand the difference between absolute advantage and comparative advantage.
A company engaged in international business might act on the information contained in the video in different ways. They may watch the video and see that