Comparative Advantage and The Benefits of Trade.
                     COMPARATIVE 
ADVANTAGE AND 
THE BENEFITS OF 
TRADE
Introduction
Comparative advantage describes a situation in which an individual, 
business or country can produce a good or service at a lower 
opportunity cost than another producer.
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 Trade 
 Trade between two agents or countries allows the countries to enjoy 
a higher total output and level of consumption than what would have 
been possible domestically.
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Example
Canada and Mexico can each specialize in the good they have a 
comparative advantage in and exchange with one another. This lets 
both countries enjoy more maple syrup and avocados than they 
could have enjoyed without trade.
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The terms of trade
Comparative advantage and opportunity costs determine the terms 
of trade for exchange under which mutually beneficial trade can 
occur.
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Absolute advantage
The ability to produce more of a good than another entity, given the 
same resources. 
For example, in a single day, Owen can embroider 101010 pillows 
and Penny can embroider 151515 pillows, so Penny has absolute 
advantage in embroidering pillows.
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Comparative 
advantage
The ability to produce a good at a lower opportunity cost than 
another entity. 
For example, for every pillow Owen embroiders his opportunity cost 
is 222 scarves knitted, while Penny must forego 333 scarves for 
every pillow she embroiders, so Owen has comparative advantage in 
embroidering pillows.
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Specialization
When an individual or a country allocates most or all of its resources 
towards the production of a particular good or service. 
For example, Sal (an individual) specializes in producing educational 
videos, and Bangladesh (the country) specializes in producing 
textiles.
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International trade
The exchange of goods, services, or resources between one country 
and another.
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Common 
Misperceptions
A country that has an absolute advantage in producing all goods still 
stands to benefit from trade with other countries, since the basis of 
the gains for trade is comparative advantage, not absolute 
advantage.
It is not possible for an individual or country to have a comparative 
advantage in all goods. There will be some other individual or 
country that can produce some things at lower opportunity costs.
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Common 
Misperceptions Cont.
"Self-sufficiency" is not necessarily a trait to be strived for in the 
global economy. Individuals or nations who try to produce everything 
for themselves are likely to end up poorer than those that engage in 
specialization and trade.
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