Each person consumes goods and services produced by many other people both in our country and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
COMPARATIVE ADVANTAGE.
There are two ways to compare the ability of two people in producing a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, not absolute advantage. In other words the comparison among producers of a good according to their opportunity cost.
ABSOLUTE ADVANTAGE
The comparison among producers of a good according to their productivity.
OPPORTUNITY COST
Whatever must be given up to obtain some item.
COMPARATIVE ADVANTAGE AND TRADE..
Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.
