32.1 The Gains from Trade LO 1, 2
Country A has an absolute advantage over Country B in the
production of a specific product when the absolute cost of the product
is less in Country A than in Country B.
Country A has a comparative advantage over Country B in the
production of a specific good if the forgone output of other goods is
less in Country A than in Country B.
Comparative advantage occurs whenever countries have different
opportunity costs of producing particular goods. World production of
all products can be increased if each country transfers resources into
the production of the products for which it has a comparative
advantage.
International trade allows all countries to obtain the goods for which
they do not have a comparative advantage at a lower opportunity cost
than if they were to produce all products for themselves;
specialization and trade therefore allow all countries to have more of
all products than if they tried to be self-sufficient.
A nation that engages in trade and specialization may also realize the
benefits of economies of large-scale production and of learning by
doing.
Traditional theories regarded comparative advantage as largely
determined by natural resource endowments that are difficult to
change. Economists now know that some comparative advantages
can be acquired and consequently can be changed. Public policies