Comparative advantage

Question 1

What is comparative advantage?

Answer 1

A country has a comparative advantage over another if it can produce a good at a lower relative opportunity cost (value of the next best alternative foregone)

Question 2

What is absolute advantage?

Answer 2

A country has an absolute advantage over another if it is able to produce a good using fewer resources

Question 3

What are the costs of comparative advantage theory?

Answer 3

• Assumes there are only 2 countries and 2 traded goods
• Assumes all traded goods are homogenous
• Ignores transport costs
• Assumes no barriers to trade
• Assumes no economies of scale