Economics
Explainer
Comparative Advantage: Why Trade Pays
A country can gain from trade even if it is worse at making everything.
Quick check · tap an answer to continue
Lesson notes
Key points
- Absolute advantage means producing more of a good with the same resources than another producer.
- Comparative advantage means producing a good at a lower opportunity cost, and this is what drives gains from trade.
- Suppose A makes 4 cloth or 2 gold, and B makes 1 cloth or 1 gold per worker-day.
- A has absolute advantage in both, yet B's gold is cheaper in cloth forgone, so both gain by specialising and trading.
Definitions
- Absolute advantage
- Ability to produce more output than another producer using the same inputs.
- Comparative advantage
- Ability to produce a good at a lower opportunity cost than another producer.
Takeaway: Trade gains come from comparative, not absolute, advantage.
Quick check: Specialisation should follow which advantage?
- Comparative advantage
- Absolute advantage
- Largest workforce
Lower opportunity cost, i.e. comparative advantage, determines gains from trade.
Absolute advantageComparative advantageWorked exampleGains from trade
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