Microeconomics (Module 2): International Trade and Comparative Advantage

Absolute Advantage

Ability to produce a good using fewer resources than another producer

Comparative Advantage

Ability to produce a good at a lower opportunity cost than another producer

David Ricardo

Economist who developed the theory of comparative advantage (1817)

Gains from Trade

Higher productivity, lower prices, greater variety from specialization and exchange

Intra-Industry Trade

Importing and exporting the same types of products between similar economies

Tariff

A tax on imported goods

Who benefits from trade?

Both countries, even if one has absolute advantage in everything

Why do countries trade?

To specialize according to comparative advantage and benefit from gains from trade

Absolute Advantage

Ability to produce a good using fewer resources than another producer

Comparative Advantage

Ability to produce a good at a lower opportunity cost than another producer

Opportunity Cost (Trade)

What you give up to produce one more unit of another good