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4 - Comparative Advantage

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University of Toronto St. George
Gustavo Indart

COMPARATIVE ADVANTAGE Gains from trade: increased output attributable to the specialization according to comparative advantage that is made possible by trade Absolute advantage: the situation that exists when one country can produce some commodity at lower absolute cost than another country Comparative advantage: the situation that exists when a country can produce a good with less forgone output of other goods than can another country Comparative advantages reflect opportunity costs that differ between countries. The gains from specialization and trade depend on the pattern of comparative, not absolute, advantage. World output increases if countries specialize in the production of goods in which they have a comparative advantage. 1) Country A has a comparative advantage over Country B in producing a product when the opportunity cost of production in Country A is lower. This implies, however, that it has a comparative disadvantage in some other product(s). 2) The opportunity cost of product X is the amount of output of other products that must be sacrificed in order to increase the output of X by one unit. 3) When opportunity costs for all products are the same in all countries, there is no comparative advantage and there is no possibility of gains from specialization and trade. 4) When opportunity costs differ in any two countries and both countries are producing both products, it is always possible to increase production of both products by a suitable reallocation of resources within each country. Summary of Questions to be Asked 1) Given a table that shows the output per unit of resource for two countries, i) Determine the c
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