Question

What does absolute advantage mean? What does comparative advantage mean? Explain which is the basis for trade, and why.

Answer 1

Absolute advantage means the firm which can produce the same amount of good with minimal resources and time. For example when United States in produce wheat more per acre when compared to that of United Kingdom then United States is having an absolute advantage in wheat.

Comparative advantage means the firm which can produce a good with minimal opportunity cost where the firm has less opportunity cost in producing one good with respect to other country then it is having a comparative advantage and if it is having your opportunity cost and producing one good with respect to other country then it is having a comparative disadvantage

usually absolute advantage is not basis for grade because of its main drawbacks where rich countries usually have absolute advantage and this does not provide any basis for trade and that is the reason why comparative advantage can be considered as a basis for trade and it is one of the most unchallenged theories in the trade economics where opportunity cost is the basis for trade and this can differ from country to country irrespective of whether it is big country or small country