2. Comparative Advantage
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5 Terms
What is Absolute Advantage
When a country can produce more goods and services compared to another country using the same resources
What is Comparative Advantage
A country should specialise in producing goods and services where they have a lower opportunity cost compared to another country and then trade
Comparative Advantage Diagram
Shallower Gradient = Comparative Advantage for the X axis
Steeper Gradient = Comparative Advantage for the Y axis
Conclusions of Comparative Advantage
Max Output - As countries specialise and divert resources towards more efficient production (countries can consume beyond their respective PPF)
Lowest Prices - As countries with comparative advantage are the lowest cost global producers
Allocative Efficiency - Resources are transferred to countries that use them the most efficiently, they can maximise output and hence meet consumer demand
Limitations/Assumptions of Comparative Advantage
No Transport Costs
Perfect Information
No Economies of Scale
No R&D/Innovation (Non-Price Factors)
