Question

Describe what absolute advantage and comparative advantage are. Which is more important for trade and why?

Answer 1

The ability of one country to produce more quantity of goods and services rather than its competitors with the same resources available to both the countries is called absolute advantage.

Ex: India can produce 50 cars in one day with 100 labour where Pakistan can only produce 5 cars with 100 labour. So here India has absolute advantage in production of cars.

The ability of a country to produce goods or service at low opportunity cost when compared to its competitors is called comparative advantage theory. Here the country in which they comparative advantage of good or service that they will consume less and produce more

Comparative advantage is more important in trade is because if a country can produce goods at low opportunity cost than it means it can produce the good at low cost. So if that country can specialize in production of that good than they can earn profits from trade due to their low opportunity cost of production of that good.