Comparative Advantage and Absolute Advantage

Comparative advantage and absolute advantage are used to compare the productivity of people (countries) in the production of a good or a service. We introduce this tool here assuming there are two people and two goods that they can each produce. Toolkit: A person has an absolute advantage in the production of a good if that person can produce more of that good in a unit of time than another person can. A person has a comparative advantage in the production of one good if the opportunity cost, measured by the lost output of the other good, is lower for that person than for another. In our example, worker A has a comparative advantage in job 2, and worker B has a comparative advantage in job 1. We have defined comparative advantage in terms of opportunity cost, so let us go through this carefully and make sure it is clear. The opportunity cost of assigning a worker to one job is the amount of output the worker could have produced in the other job. We can measure opportunity cost in terms of the output lost from assigning a worker to job 2 instead of job 1. The opportunity cost of assigning worker A to job 2 rather than job 1 is 3 units (9 − 6). The opportunity cost of assigning worker B to job 2 rather than job 1 is 4 units of output (8 − 4). The opportunity cost is higher for worker B, which is another way of saying that worker B has a comparative advantage in job 1. Worker B should be assigned to job 1, and worker A should take on job 2. We could equally have measured opportunity cost the other way around: as the output lost from assigning a worker to job 1 rather than job 2. The opportunity cost of assigning worker A to job 1 rather than job 2 is −3 units (6 − 9). The opportunity cost of assigning worker A to job 1 rather than job 2 is less, it is −4 units of output (4 − 8). Worker A has the higher opportunity cost (−3 is greater than −4), so we again conclude that worker A should be assigned to job 2. Changes in Productivity Suppose that this simple economy is indeed operating efficiently, with worker A in job 2 and worker B in job 1. Then imagine that the productivity of one of these matches changes.