Question

Define absolute and comparative advantage and Compare the two views on trade.

Answer 1

By absolute advantage we mean country or entity produces the good at lower per unit cost than other country or entity

By comparative advantage we mean country or entity can produce a good a lower cost than anyone else.

Comparative advantage holds when absolute advantage holds but absolute advantage does not also hold when comparative advantage holds. According to absolute advantage country must export a good if it has absolute advantage in it but according to comparative advantage country can import a good in which it has absolute advantage over other country provided it has comparative advantage in other good. Absolute advantage can explain only small volume of trade. Comparative advantage can explain most of international trade. Trade between developed and developing countries is usually based on absolute advantage but trade between developed countries is usually based on comparative advantage