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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