Assume a world of two nations USA and 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.   Define “absolute advantage”  Which country, Australia or USA, has an absolute advantage in the production of agriculture and machinery? Explain the basis for your answer.  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.

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.