CAS EC 101 Chapter Notes - Chapter Chapter 2: 2.2: Absolute Advantage, Comparative Advantage, Opportunity Cost

• School: Boston University
• Department: Economics
• Course: CAS EC 101
• Professor: Neal Becker

Document Summary

Specialization and gains from trade: suppose country a produces good a and country b produces good b. If both countries like both goods, there is an obvious opportunity for both of you to gain from trade. B is more efficient at producing good b. It would make sense for country a to concentrate on producing good. You can then trade 10 pounds of apples to your neighbor for 15 pounds of cherries. Moved beyond your ppf: your neighbor has also benefited from trade, your neighbor specializes in picking only cherries. Absolute advantage versus comparative advantage: definition of absolute advantage: the ability of an individual, a firm, or a country to produce more or a good or service than competitors, using the same amount of resources. Comparative advantage and the gains from trade: the basis for trade is comparative advantage, not absolute advantage.