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Relative Vs Absolute Advantage - Benefits of specialization

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As a manager of a financial planning business you have two financial planners, Phil and Francis. In an hour, Phil can produce either one financial statement or answer 8 phone calls, while Francis can either produce 4 financial statements or answer 10 phone calls. Does either person have an absolute advantage in producing both products? Should these two planners be self-sufficient (each producing statements and answering phones) or specialize?

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Solution Summary

This main objective of this post is to expain how the benefits of specialization work. The concepts covered in the post are relative advantage and absolute advantage. The concepts are explained for individuals but can be easily applied for evaluating the relative and absolute advantage for countries.

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Francis has an absolute advantage in producing both products as he can produce more financial statements in an hour that that by Phil and he can answer more number of calls in an hour than that by Phil.

Production per hour Production per day (Assuming 8 hours day)
Financial Phone Financial Phone Calls
Statements Calls Statements
Phil 1 8 8 64
Francis 4 10 32 80

If both are self sufficient then both will produce 5 financial statements in an hour or will answer 18 phone calls in an hour. Therefore, if they spend 2 hours on producing financial statements and one hour to answer phone call, their combined output will be 10 financial statements and 18 calls. Francis has relative advantage in prepare financial statements and Phil has relative advantage in answering ...

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