Studied by 1 person
Absolute Advantage
the ability to produce more of a good or service with a given amount of resources than someone else.
Comparative Advantage
the ability to produce a good at the lowest opportunity cost.
Terms of Trade
the rate at which one good can be exchanged for another.
What are the two types of problem?
Output and Input
Output Problems
Focus on data related to what each party can produce with a given set of resources.
Input Problems
Focus on the amount of resources needed to produce one unit of a particular good or service.
Favorable terms of trade
a country means that it can purchase more imports for the same amount of exports, which can consequently boost its economy.
Unfavorable terms of trade
has to export more to purchase the same amount of imports, which is damaging to its economy.
How to determine the absolute advantage in Output problem?
By simply looking for which country can produce a higher amount of the good or service.
How to determine the comparative advantage in Output problem?
You have to calculate per unit opportunity cost using the formula give up/gain (the amount of good you are giving up divided by the amount of good you are gaining). Once you have calculated per unit opportunity cost, the country with the lowest one has a comparative advantage.
How to determine the absolute advantage in Input problem?
By looking for the country that uses the least amount of resources (i.e. the lower number).
How to determine the comparative advantage in Input problem?
Calculate the per unit opportunity cost using the formula gain/give up. Once you have calculated the per unit opportunity cost the country with the lowest one has a comparative advantage.
