AP Macroeconomics / Unit 1: Basic Economic Concepts
1.3 Comparative Advantage and Gains from Trade
Notes
- Absolute advantage: producing more with the same resources.
- Comparative advantage: lower opportunity cost. Trade based on comparative advantage benefits both sides.
Practice
Country A gives up 2 cloth per wheat; B gives up 4 cloth per wheat. Who has the comparative advantage in wheat?
Lower opportunity cost.
Then the comparative advantage in cloth belongs to:
B gives up only 1/4 wheat per cloth.
Trade benefits both countries when terms of trade are:
Both gain.
Ready for more? Take the Unit 1 test.