Course

Absolute Advantage

Instructor: Alex Tabarrok, George Mason University

Absolute Advantage : The ability to produce the same good at a lower cost per unit than another producer. This is from the video “ Another Look at Comparative

Absolute Advantage: The ability to produce the same good at a lower cost per unit than another producer. This is from the video “Another Look at Comparative Advantage” in the Principles of Microeconomics course.

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Transcript

It's actually useful to understand comparative advantage to begin with a false theory: a very plausible, but incorrect theory of trade, namely the theory of absolute advantage.


So, let's consider a simple model. Let's suppose that labor is the only good used in production and that we can produce computers or shirts. Let's suppose that in Mexico it takes 12 units of labor to produce one computer. Again, in Mexico, it takes two units of labor to produce one shirt. Now let's compare it with the United States. To make it simple, we'll suppose in the United States it takes just one unit of labor to make one computer, and one unit of labor to create one shirt. Now, from the absolute advantage theory of trade, it should-- it may seem obvious that there in fact will-- be no trade here.


It may seem obvious that the United States will outcompete Mexico on all margins. After all, the United States in this example is much more productive at producing computers and also more productive at producing shirts than Mexico. So, this is a case where we might think, with the United States so much better at producing both computers and shirts, that certainly there's no reason for the United States to trade with Mexico, its less productive neighbor. That's the theory of absolute advantage. It's very plausible; it's also very wrong.

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