Unit 7 - Comparative and Absolute Advantage

Absolute advantage -  one country would have an absolute advantage over the other if it can produce same amount of goods with fewer resources.

• This is then the ability of country to produce more goods than its competitors using same or less resources.

Comparative advantage  - the production of a product  can produce the product at a lower domestic opportunity cost than can a trading partner.

• It is also the basis for all trade.
• If the two nations specialize according to comparative. advantage, then to get the other product, they must trade.

Terms of Trade - the rate of exchange of two products is be determined through negotiation

• Terms of trade - the outcome .
• Gains from trade are based on comparative advantage, not absolute advantage

Specialization and Trade

• Specialization based on comparative advantage improves global resource allocation.
• Specialization and trade - increase productivity and the standard of living within a nation.
• Because of specialization and trade, there will be a larger global output of goods and services.

Input and Output Approach

• Output problem - based on the most of an item producer can make if it specializes using a set amount of resources.
• Take B/A for comparative advantage and pick the highest amount for absolute advantage.
• Input problem approach -  based on the least resources producer needs to make a set amount of an item .
• Take A/B for comparative and pick lowest amount for absolute.