An absolute advantage in the production of agriculture and machinery - Explain the basis for your answer

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Question 1: Absolute and Comparative Advantage

Assume a world of two nations USA and Australia.The two nations produce machinery and agriculture. The USA can produce 160 units of machinery or 200 units of agriculture while Australia can produce 140 units of machinery or 50 units of agriculture, in the same time period.

a. Define "absolute advantage"

Answer: Absolute advantage is defined as the capability to produce better services and goods than similar rival firms in the competitive marketplace for profit maximization. Through the element, the particular country's economy can have a greater production outflow with similar quantities of inputs (Ciffolilli and Muscio, 2018, p2324(2)). In this context, only a few resources are required to produce a similar amount of extraordinary products or services. Then it will be considered as lower costs while comparing with other countries.

b. Which country, Australia or USA, has an absolute advantage in the production of agriculture and machinery? Explain the basis for your answer


The USA produces 160 units of machinery and 200 units of agriculture. In the same period and similar inputs, Australia can produce only 50 units of agriculture and 140 units of machinery. According to the definition of absolute advantage, it can be profound that the USA has an absolute advantage to produce agriculture and machinery while compared with Australia. The reason for considering the USA as an absolute advantage country is because it can produce larger quantities of units in the agriculture and machinery sector with a similar timeframe offered in Australia.

Comparative advantage is defined as the economy's capability to process services and goods with lower opportunity costs than its merchandising partners. Through the competitive advantage, the company can sell their produced goods or offered services with lower pricing patterns than its competitive firms to explore stronger sales marginal costs (Davis and Dingel, 2020, p110(3)).

c. Which country - Australia or USA - has a comparative advantage in production of machinery and agriculture? Define comparative advantage and explain how it applies in this example.

Answer: Considering the matter of agriculture and machinery production, the opportunity cost for the USA is lower than Australia. The agricultural sector contributed 3% of Australian GDP in 2019 while the USA's agricultural sector contributed 0.6% of GDP in 2019 (Higgott, 2019, p45(1)). That is why it can be claimed that the opportunity cost in machinery and agricultural production in Australia is quite higher than in the USA. Despite having lower opportunity costs, the USA has produced more agricultural and machinery products and services than Australia. Hence, the USA is considered a comparative advantage country.

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