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A numerical example of absolute and comparative advantage

Consider a hypothetical world with two countries, Saudi Arabia and the United States, and two products, oil and corn. Further assume that consumers in both countries desire both these goods. These goods are homogeneous, meaning that consumers/producers cannot differentiate between corn or oil from either country. There is only one resource available in both countries, labor hours. Saudi Arabia can produce oil with fewer resources, while the United States can produce corn with fewer resources. [link] illustrates the advantages of the two countries, expressed in terms of how many hours it takes to produce one unit of each good.

How many hours it takes to produce oil and corn
Country Oil (hours per barrel) Corn (hours per bushel)
Saudi Arabia 1 4
United States 2 1

In [link] , Saudi Arabia has an absolute advantage in the production of oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States. The United States has an absolute advantage in the production of corn.

To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see [link] ). We illustrate what each country is capable of producing on its own using a production possibility frontier (PPF) graph, shown in [link] . Recall from Choice in a World of Scarcity that the production possibilities frontier shows the maximum amount that each country can produce given its limited resources, in this case workers, and its level of technology.

Production possibilities before trade
Country Oil Production using 100 worker hours (barrels) Corn Production using 100 worker hours (bushels)
Saudi Arabia 100 or 25
United States 50 or 100

Production possibilities frontiers

These graphs illustrate the production possibilities frontier before trade for both Saudi Arabia and the United States using the data in the table titled “Production Possibilities before Trade”. The x-axis plots corn production, measured by bushels, and the y-axis plots oil, in terms of barrels. All points above the frontier are impossible to produce given the current level of resources and technology.
(a) Saudi Arabia can produce 100 barrels of oil at maximum and zero corn (point A), or 25 bushels of corn and zero oil (point B). It can also produce other combinations of oil and corn if it wants to consume both goods, such as at point C. Here it chooses to produce/consume 60 barrels of oil, leaving 40 work hours that can be allocated to producing 10 bushels of corn, using the data in [link] . (b) If the United States produces only oil, it can produce, at maximum, 50 barrels and zero corn (point A'), or at the other extreme, it can produce a maximum of 100 bushels of corn and no oil (point B'). Other combinations of both oil and corn are possible, such as point C'. All points above the frontiers are impossible to produce given the current level of resources and technology.

Arguably Saudi and U.S. consumers desire both oil and corn to live. Let’s say that before trade occurs, both countries produce and consume at point C or C'. Thus, before trade, the Saudi Arabian economy will devote 60 worker hours to produce oil, as shown in [link] . Given the information in [link] , this choice implies that it produces/consumes 60 barrels of oil. With the remaining 40 worker hours, since it needs four hours to produce a bushel of corn, it can produce only 10 bushels. To be at point C', the U.S. economy devotes 40 worker hours to produce 20 barrels of oil and the remaining worker hours can be allocated to produce 60 bushels of corn.

Questions & Answers

Macroeconomic definetion
farooq Reply
I need short examples for costumer
Palden
we are costumer of this application,
sarajuddin
Marshall 's definition
Arun Reply
perfectly competitive firm earn zero economic profit in the long run.is it true or false
Sapna Reply
False...some, in the long run earn normal profit while some zero or negative profit(loss) which forces them out of the market..
Alex
what is supply
Sapna Reply
supply is the amount of goods and services that supplies are willing and able to sell at a given price at a particular period of time.
Bukari
Hey how Sapna...I have the que... I can see supply does with selling;yah that's great... So cost of production is the determinant of supply though;how does it relate to selling yet? The supply definition u just gave is not complete yet... *SUPPLY* DEFINITION HAS TO DO WITH SELLING AND PRODUCING.
Mahapa
what is difference between elastic and inelastic ?
saqlain Reply
what does a supply curve look like?
master Reply
It's the curve that has a positive gradient
Mahapa
you are right mahapa
Francis
please explain cob doglas thiory
Ibrahim
'cardinal utility implies ordinal utility'.Do you agree?
Bukari
prove
Bukari
what is relative price.?
Harpreet Reply
when the price of 2 commodity is compared with each other,the price of one commodity to another one's price is said to be relative price
Royalranjan
business organization and industry?
ALIYU Reply
history of monetary policy
Estah Reply
instrument of monetary policy
mustapha
open market,funding ,bank rate
Muafue
open market operation,Funding,Bank rate
Muafue
thanks guys
Estah
What is elasticity?
Moses Reply
level or degree of responsiveness of change in quantity as a result of change in price
Alex
is the degree of responsiveness of a quatity demand respond to small charge in price
EBENEZER
the degree of responsiveness of quantity demanded to a change in price, income or other related commodities
Dorothy
what are the Factor affected elastricity of demand and supply
Kelvin Reply
price of other related goods
Frank
fine
Bisrat
Taste. Income.
Chandrapaul
what is economic ?
Cabdulahi Reply
what is price ceiling and price floor
Mokom Reply
price ceiling is a government deliberate act of imposing a limit on prices of goods n services sold in an economy...price floor is exactly the opposite
Alex
both are a form of price control by the government. price ceiling is the subsidy to consumer by setting maximum limit to the price and prducers of good cannot charge a higher price than this price limit which is known as price ceiling
Amber
what's the difference between average product and marginal product
Francis Reply
average cost/revenue and marginal cost/revenue
Alex
A Washington state district court currently has subject matter jurisdiction over many types of civil cases, if the amount in controversy is $150,000 or less.
Sina Reply

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Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
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