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International Trade
- If countries specialize in the production of certain goods and then trade with other countries there will be an increase in economic welfare. Countries will specialize in those goods where they have a comparative advantage
Absolute Advantage:
This occurs when one country can produce a good with less resources than another. E.G. if USA can produce cars with lower cost than the UK the USA has an absolute advantage in producing cars.
Comparative Advantage:
A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost:
i.e. it has to forego less of other goods in order to produce it.
The Law of Comparative advantage
This states that trade can benefit all countries if they specialise in the goods in which they have a comparative advantage
Revision Notes on Trade
Limitations of Comparative Advantage