Question

If you want to examine trade relations between two countries, do you look at the absolute advantage of each country or the comparative advantage? explain why?

Answer 1

COMPARATIVE ADVANTAGE examine trade relation between two countries .

Take example

With a fixed amount of resources the usa and south korea can produce a following amount of apples and smartphone

	USA	S KOREA
APPLE	39	24
SMARTPHONE	13	12

ABSOLUTE ADVANTAGE : when a country produce more of particular good with certain amount of resources. Then they have absolute advantage

In our example , USA has absolute advantage in the production of both apple and smartphone . Usa is more efficient than korea production of these good

COMPARATIVE ADVANTAGE : when a country produce good at lower opportunity cost than other country than we have comparative advantage .

as you see we take trade decision on the basis of comparative advantage not on the basis of absolute advantage . Usa has comparative advantage in apple and south korea has comparative advantage to produce smartphone . Trade happen between two countries both benefits from them , leads to trade specialization .