Economic HL comparative and absolute advantage

international trade

the exchange of a good, service or resource that involves the export and import between countires

absolute advantage

the ability of a country to produce more of a particular good or service within the same quantity of resources compared to a trading partner

comparative advantage

the ability of a country to produce a good or service at a lower opportunity cost compared to another country

opportunity cost

the value of the next best alternative not chosen when an economic decision is made

limitations of comparative advantage theory

that comparative advantage is fixed/ a static model

no barriers to international trade (tarifs, quotas)

transportation costs

consumers and producers have perfect knowledge

full specialization

constant opportunity cost

comparative advantage theory

suggests that countries would benefit from producing and trading products in which they have a comparatively lower opportunity cost

benefits of international trade:

• increased competition = local firms/producers forced to be more efficient and innovative

• lower prices

• greater choice

• access to larger markets

• more efficient resource allocation

• more efficient production