Comparative and Absolute Advantage Quiz

Introduction to Comparative and Competitive Advantage

• A key principle in regional economic development is spatial interaction—the movement of goods, services, and people.
• International trade theory has a vast amount of literature on understanding patterns and characteristics of trade between nations.
• This focuses on comparative advantage and competitive advantage.

Comparative Advantage

• British economist David Ricardo developed the concept of comparative advantage in the early 19th century.
• Comparative advantage is an economy's ability to produce goods and services at a lower opportunity cost than trade partners or competitors.
• A comparative advantage allows a region or company to sell goods and services at a lower price than competitors, resulting in stronger sales margins.

Comparative Advantage (Continued)

• Comparative advantage is often used interchangeably with absolute advantage, but they are distinct concepts.
• Absolute advantage is the ability of a country, individual, company, or region to produce a good or service at a lower cost per unit than another entity producing the same good or service.

Absolute Advantage and Comparative Advantage

• Absolute advantage focuses on using fewer resources to produce more goods and services than others.
• Comparative advantage focuses on producing goods and services at a lower opportunity cost.

Examples of Comparative Advantage

• Saudi Arabia has an absolute advantage in oil production, taking fewer hours per barrel than the United States.
• The United States has an absolute advantage in corn production.
• Libya has a comparative advantage in oil production compared to Nigeria and a comparative advantage in corn production compared to Nigeria in specific examples.
• France has an absolute advantage in producing both sweaters and wine in comparison to Tunisia.

Comparative Advantage Example 3

• Brazil can produce 100 pounds of beef or 10 autos, while the United States can produce 40 pounds of beef or 30 autos.
• Brazil has an absolute advantage in producing beef.
• The United States has an absolute advantage in producing autos.
• Calculate Opportunity Cost for Brazil and USA.

Opportunity Cost

• The opportunity cost of producing one pound of beef in Brazil is 1/10 of an auto.
• The opportunity cost of producing one pound of beef in the United States is 3/4 of an auto.
• Brazil has a comparative advantage in beef production compared to USA.
• The opportunity cost of producing one auto in Brazil is 10 pounds of beef.
• The opportunity cost of producing one auto in the United States is 4/3 pounds of beef.
• The United States has a comparative advantage in auto production compared to Brazil.

Law of Comparative Advantage

• A nation (or region) benefits by exporting a good that it produces at a lower opportunity cost than other nations or regions.
• Conversely, a nation benefits by importing a good that it might produce at a higher opportunity cost.

Factors Influencing Comparative Advantage

• Resource Endowments: A country has a comparative advantage— producing goods and services using its relatively abundant resources. This includes natural, human, and skilled labour.
• Demand Pattern: High demand in the domestic and international markets can boost a region's comparative advantage. Providing goods and services to meet these needs is crucial.

Factors Influencing Competitive Advantage

• National and International Policies: National policies (e.g., infrastructure, export promotion, education, R&D) and policies of international bodies (e.g., IMF, WTO) affect competitiveness. Industrial policies such as subsidies and tax preferences, and tariffs are vital.
• Technological Superiority: Regions with advanced technology can produce higher-qualtiy, durable goods in greater quantities. Economies of scale can reduce production costs.

Competitive Advantage of a Region (Continued)

• Firm Strategies, Structure, and Rivalry: Managerial and organizational modes; and the existence of competitive pressures from other firms within the industry. Domestic rivalry forces companies to innovate continuously and upgrade to achieve sustainable competitive advantage.
• Firms that succeed in world markets drive a nation's prosperity. A nation’s competitiveness depends on its industry's ability to innovate and upgrade.

Framework for Comparative Advantage

• A framework showing how physical and human resources, business environments, technology/scaling, and demand/markets all impact comparative advantage.

Competitive Advantage (Continued)

• Definitions vary, but often it involves more competitive markets (lower barriers), large numbers of firms, or lower prices.
• A region's ability to outperform rivals due to unique products/services, high demand, or superior quality.
• A country's prosperity comes from firms succeeding in global markets. A country’s competitiveness relies on its industry's capacity for innovation and growth.

Factors Influencing Competitive Advantage (Continued)

• Factor Conditions: Not the conventional resources (land, labor); but rather specialized skills, scientific institutions, and other created factors matching industry needs.
• Demand Conditions: Sophistication and demand from domestic markets drive innovation faster than in less demanding markets.
• Related and Supporting Industries: Internationally competitive, innovative, and upgrading industries are more effective than component/raw material producers.

Factors Influencing Competitive Advantage (Continued)

• Firm Strategies, Structure, and Rivalry: Managerial, organizational aspects, and competitive pressures within the industry. Domestic rivalry pressures businesses to constantly upgrade and innovate to sustain advantage.

Determinants of National Competitive Advantage

• A graphic showing how innovation strategies relating to supply factors and supporting industries, combined with business environment, government policies, and supporting industries, affect firms, and innovation relating to demand factors and product differentiation affect firms' ability to achieve national competitive advantage.

Globalisation & Regional Competitiveness

• Increased global trade has led to greater competition amongst enterprises, nations, and regions.
• Countries and regions are seeking to measure local competitiveness.

Linking Comparative and Competitive Advantage

• Firm level forces (competitive advantage) are more influential in intra-industry trades amongst developed countries.
• Country level forces and comparative advantage are more relevant in trade between developed and developing countries, particularly regarding inter-industry trade.

Test your knowledge on the concepts of absolute and comparative advantage in international trade. This quiz includes questions about the production of oil, corn, sweaters, wine, and autos in various countries. Challenge yourself to understand opportunity costs and efficient resource use.