Distinction Between Absolute And Comparative Advantage
Economics notes
Distinction Between Absolute And Comparative Advantage
➡️ Comparative Advantage: This is the main reason for international trade, as countries can specialize in the production of certain goods and services that they have a comparative advantage in, allowing them to produce them at a lower cost than other countries.
➡️ Market Size: International trade allows countries to access larger markets than they would be able to domestically, allowing them to increase their sales and profits.
➡️ Exchange Rate: Exchange rate fluctuations can make it more profitable for countries to export their goods and services to other countries, as they can take advantage of the exchange rate to increase their profits.
What is the difference between absolute and comparative advantage in economics?
Absolute advantage refers to a situation where a country can produce a good or service more efficiently than another country, while comparative advantage refers to a situation where a country can produce a good or service at a lower opportunity cost than another country.
How does the concept of comparative advantage affect international trade?
The concept of comparative advantage suggests that countries should specialize in producing goods and services in which they have a comparative advantage and trade with other countries to obtain goods and services in which they do not have a comparative advantage. This leads to increased efficiency and higher levels of economic growth.
Can a country have a comparative advantage in all goods and services?
No, a country cannot have a comparative advantage in all goods and services. This is because comparative advantage is based on the concept of opportunity cost, which means that a country must give up producing one good or service to produce another. Therefore, a country can only have a comparative advantage in a limited number of goods and services.