Unit 7
Absolute Advantage
- Individual: exists when a person can produce more of a certain good/service than someone else in the same amount of time (or can produce a good using the least amount of resources.)
- National: exist when a country can produce more of a good/service than another country in the same time period.
Comparative Advantage
- A person or a nation has a comparative advantage in the production of a product when it can produce the product at a lower domestic opportunity cost than can a trading partner.
- Ex. for input: number of hours to do a job, number of acres to feed a horse, number of gallons of paint to paint a house.
- Ex. for output:
Specialization and Trade
- Gains from trade are based on comparative advantage, not absolute or advantage.
An example: Specialization refers to the tendency of countries to specialize in certain products which they trade for other goods, rather than producing all consumption goods on their own. Countries produce a surplus of the product in which they specialize and trade it for a different surplus good of another country. The traders decide on whether they should export or import goods depending on comparative advantages.
ReplyDeleteAn easy way to remember input is that it has to do with time.
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