Question

What are absolute advantage and comparative advantage? Why will resources specialize according to their comparative advantages? Why will this specialization increase production? Why will specialization increase trade?

Answer 1

Absolute advantage is when a country achieves maximum production by the low cost of production. The other countries for producing the same amount of goods uses a maximum number of inputs. Suppose China and other Asian countries have an absolute advantage in the production of manufacturing goods as they have a low cost of labor supply.

A comparative advantage is achieved when a country has an ability to produce a good or service at lower marginal and opportunity cost. Resources specialize according to their comparative advantage because this gives a clear benefit to the country who specialize in one skill. For example, the oil supplying countries ahs clear cut advantage and hence are the richer country in the world.