BU491 Study Guide - Midterm Guide: North American Free Trade Agreement, Floating Exchange Rate, Absolute Advantage
Document Summary
Technical test answers set #1: describe and compare the comparative vs. competitive advantages concepts. What is the relevancy of these concepts to international trade and globalization based on the articles and textbooks reviewed in bu481 and bu491. The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced. Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. Country 1 is more efficient than country 2 at producing both products, however there are still gains for each country through trade.
