A nation which has can produce at a lower cost when measured in terms of opportu

Question

A nation which has can produce at a lower cost when measured in terms of opportunity cost is said to have a comparative advantage. Even though the U. S. has an absolute advantage in needing fewer workers to produce a given quantity of either shoes or refrigerators. Mexico has a comparative advantage in production of shoes and the U. S. has a comparative advantage in the production of refrigerators. Comparative advantage identifies the area where a producer's absolute advantage is relatively greatest, or where the producer's absolute disadvantage in productivity is relatively least. The U.S. can produce 1,000 shoes with four-fifths as many workers as Mexico ( 4 vs. 5), but can produce 1,000 refrigerators with only one-quarter as many workers (1 vs. 4). Thus, the comparative advantage of the U. S., where its absolute productivity advantage is relatively greatest, lies with refrigerators, and Mexico's comparative advantage, where its absolute productivity disadvantage is least, is in the production of shoes."

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Explanation / Answer

Comparative advantage is the term that is used to tell that which country is specialize in the production of one good. Opportunity cost is used to describe comparative advantage. A nation or country which has the lower opportunity cost in the production of a good , implies that country has a comparative advantage in producing the same good. Even if U.S or a country has an absolute advantage in the production of both good or producing shoes and refrigerators. Absolute advantage is that the country need fewer workers to produce a given good. But after all the absolute advantage , Mexico has a comparative advantage in the producion of shoes because of lower opportunity cost in the production of shoes . And U.S has a comparative advantage in the production of refrigerators.

Comparative advantage is the area where producer's absolute advantage is relatively greatest . U.S can produce 1000 shoes with 4/5th as many workers as Mexico but can produce 1000 refrigerators woth only 1/4th as many workers as Mexico. Thus, Comparatie advantage is where absolute advantage is relatively larger.

This happens, because U.S comparative advantage is with refrigerators as its absolute advantage is relatively larger with refrigerators . And Mexico comparative advantage is with shoes as its absolute disadvantage is relatively less with shoes.

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