Comparative Advantage and Trade

Comparative Advantage, Specialization, and Gains from Trade

• Comparative Advantage: the ability of a country to produce a good or service at a lower opportunity cost than another country

• Specialization: the process by which individuals or nations focus on a narrow range of goods or services, enhancing efficiency and productivity

  • whoever has the comparative advantage

• Gains from Trade: the benefits that countries receive from engaging in international trade, leading to increased overall welfare and economic growth

Comparative Advantage and Absolute Advantage

• Absolute Advantage: the ability of a country to produce a good more efficiently than another country, utilizing fewer resources to achieve the same level of output

Terms of Trade and the Gains from Trade

• someone would be willing to sell something at price > comparative advantage

• someone would be willing to buy something at a price < opportunity cost