Comparative advantage

Week 1

What is a comparative advantage? and when should countries import goods?

Occurs when a country can produce a good or service at a lower opportunity cost than another country. Countries should import goods when they lack the comparative advantage.

What is opportunity cost?

It is the foregone benefits from choosing one alternative over others.

What is comparative advantage in free trade?

Shows that even if a country enjoys an absolute advantage in the production of goods, trade can still be beneficial to both trading partners.

If one country has a competitive advantage in one aspect, and another country has a competitive advantage in another aspect, How would free trade be beneficial to both countries?

Both countries would trade with the aspect which they didn’t have a competitive advantage for in order to get more for there money and time.