Comparative Advantage and International Trade

Vocabulary flashcards covering the key concepts of absolute advantage, comparative advantage, opportunity cost calculations, and gains from trade based on lecture notes.

Absolute Advantage

The ability to produce a good using fewer inputs than another producer.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Rule of Comparative Advantage Across Two Goods

One country can never have a comparative advantage in producing both goods, even if it has an absolute advantage in producing both goods.

Trade Requirement Condition

Absolute advantage is not a necessary condition for countries to engage in trade.

Brazil's Absolute Advantage (Class Activity)

Brazil has an absolute advantage in coffee because it produces $2\,\text{pounds}$ of coffee in one hour while Argentina produces only $1\,\text{pound}$.

Argentina's Comparative Advantage (Class Activity)

Argentina has a comparative advantage in milk production because its opportunity cost ($0.2\,\text{pounds}$ of coffee per liter) is lower than Brazil's ($0.5\,\text{pounds}$ of coffee per liter).

Total Output Without Trade (Class Activity)

When both countries split their $1{,}000\,\text{hours}$ equally between coffee and milk, total output is $1{,}500\,\text{pounds}$ of coffee and $4{,}500\,\text{liters}$ of milk.

Total Output With Trade (Class Activity)

When each country spends all its time producing the good in which it has a comparative advantage, total output is $2{,}000\,\text{pounds}$ of coffee and $5{,}000\,\text{liters}$ of milk.

Net Gain from Free Trade (Class Activity)

Free trade increases total coffee production by $500\,\text{pounds}$ and total milk production by $500\,\text{liters}$.

Specialization

When people or countries allocate all their resources to producing goods in which they have a comparative advantage, allowing the economic "pie" to grow.

Interdependence and Trade

An economic relationship that allows everyone to enjoy a greater quantity and variety of goods and services.