There are two ways to compare the ability of two people or two countries to produce...

There are two ways to compare the ability of two people or two countries to produce a good: an absolute advantage and a comparative advantage. Which one is the gains from trade are based on? Why? Provide a numerical example illustrating the difference between the two. Short answer please!

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Answer)

The absolute advantage means the advantage that a country posess in the production of a good when it can produce it in more quantity than other country.

The comparative advantage is the advantage when a country can produce a good at lower cost as compared to other country.

Suppose, Country A can produce 4 units of Cars or 2 units of scooters with the available labor units.

Similarly, Country B can produce 8 units of Cars or 16 units of scooters.

From the above information, we can say that country B has absolute advantage in the production of both the goods as it can produce them in higher quantities as compared to country A.

But Country A has comparative advantage in the production of Cars as it can produce them with low opportunity cost equal to 0.5 (No. of scooters÷ No. of cars = 2÷4).

Similarly, Country B has comparative advantage in the production of Scooters as it can produce them with low opportunity cost equal to 0.5 (No. of cars ÷ No. of scooters = 8÷16).

The gains of trade depend upon the compararive advantage as it shows which country is efficient is producing a good so that different countries can produce the different which they can produce at low cost and trade with each other.

Rahul Sunny answered 10 months ago

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