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Absolute and Comparative Advantage Created by Jacob Finnell The Terms Actor: Firm, individual, nation, or other participant in the economy. Opportunity Cost: The benefit that would have been received by taking the next best action instead of the action taken. Absolute Advantage: The ability of an actor to produce more of a good or service than a competitor. Comparative Advantage: The ability of an actor to produce a good or service for a lower opportunity cost than a competitor. Autarky: A state of affairs in which countries do not trade, and only acquire goods or services from within. Absolute Advantage within Businesses Absolute advantage is easy to understand. It is producing more of a good or service for the input Bookend Bookstore: provided (money, labor hours, etc.) Star Wars Books: $25 Imagine you have $1000 to spend, and you want both House DVDs: $20 DVDs of House M.D. and Star Wars Expanded Mockbuster: Universe Novels. There are two stores in your area Star Wars Books: $10 that sell them. House DVDs: $15 It becomes clear that Bookend Bookstore has an absolute advantage in selling both products, so you would only buy these products from Bookend. Absolute Advantage within Nations Imagine you have two countries, California, and Mexico that make two goods, tequila, and wine. California: How much of each good a country can produce is listed off to the right. 100 bottles of Wine You can see California can make more of OR 50 bottles of Tequila everything and therefore has an absolute advantage in producing both goods. Mexico: 20 bottles of Wine OR Under Autarky, California might produce 50 40 bottles of Tequila bottles of wine and 25 bottles of tequila.
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