Absolute advantage refers to the ability of an entity to produce more of a good or service than another entity using the same amount of resources
If Country A can produce 100 units of wheat with the same resources that Country B uses to produce 80 units, Country A has an absolute advantage in wheat production.
Comparative advantage refers to the ability of an entity to produce a good or service at a lower opportunity cost
What is the formula to calculate the opportunity cost of producing good X?
\frac{\text{Amount of Y given up}}{\text{Amount of X produced}}</latex>
Absolute advantage is determined by quantity of output, while comparative advantage is determined by opportunity cost.
Opportunity cost is the value of what is given up when choosing one alternative over another
What is the formula to calculate opportunity cost?
Value of what is gainedValue of what is given up
If attending a college class costs $50 in tuition and $45 in lost income, the opportunity cost of attending the class is $95.
Gains from trade refer to the economic benefits derived from engaging in international or domestic trade
Steps of how gains from trade are achieved
1️⃣ Specialization
2️⃣ Efficiency
3️⃣ Wider Choice
4️⃣ Lower Prices
5️⃣ Economic Growth
If Country A specializes in wheat and Country B in textiles, they can both enjoy more of both goods at lower costs through trade.
Comparative advantage refers to the ability to produce a good or service at a lower opportunity cost
What is the formula to calculate opportunity cost for comparative advantage?
Amount of X producedAmount of Y to give up
If Country A and Country B have the same opportunity costs for producing wheat and cars, neither has a comparative advantage.
Specialization is one of the key reasons for gains from trade
Benefits of trade from specialization
1️⃣ Wider Choice
2️⃣ Lower Prices
3️⃣ Economic Growth
The comparative advantage theory assumes no transport costs or economies of scale.
What is one limitation of the comparative advantage theory regarding income inequality?
Trade benefits may not be even
Real-world applications of comparative advantage include international trade agreements
The comparative advantage theory may lead to unequal income distribution and environmental degradation.