The basis for trade Essay
An absolute advantage occurs when a country produces a given good at a lower cost and higher productivity over another. As such, a country would be advantaged if it specializes in the producing the cheapest goods. Comparative advantage on the other hand occurs when a country produces a given good at a lower opportunity cost when compared to another country. Comparative advantage determines the exports and imports of a given country. As such, countries driven by a comparative advantage specialize in production by allocating their limited resources in producing goods and services that have low opportunity cost. Such countries also receive high gains from trade. For example, if both America and Italy produce alcohol and fabric, and America have a comparative advantage in fabric and Italy in alcohol, both countries can specialize in goods they are best in to gain more returns from trade.
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