FMSC 290 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost
1 May 2018
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Reading chapter 3 in book Microecnomics Mankiw
• absolute advantage: the ability to produce a good using fewer inputs than another
producer
• opportunity cost: whatever must be given up to obtain some item
• comparative advantage: the ability to produce a good at a lower opportunity cost than
another producer
o impossible for a person to have comparative advantage in both products
• the gains from trade are based on comparative advantage, not absolute advantage
• trade can benefit everyone in society because it allows people to specialize in activities in
which they have a comparative advantage
• for both parties to gain from trade, the price at which they trade must lie between the two
opportunity costs
• imports: goods produced abroad and sold domestically
• exports: goods produced domestically and sold abroad
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