Principles of absolute & Comparative Advantage

A country has ~ in production of a g/s if it can produce it using fewer resources & at a lower cost than another country,

• 2 countries-2 guds model
• Assumptions:

1. Production & opportunity cost r constant for each product.

• A country is said to have ~ in production of a gud if it can produce more of gud than another country having same amount of resources.
• This country is more efficient in production of that gud.
• Country will specialise in production of gud for which it has an ~.

• Trade occurs when countries have a clear-cut/absolute advantage over other countries.

• Even though a country may have absolute advantage in production of both guds, trade can still be mutually beneficial when countries specialise based on principle of ~.
• A country has ~ if it can produce gud at a lower opportunity cost.
• Multi-lateral free trade is beneficial for overall well-being of world economy.
• It ensures that guds r produced in those countries that r most efficient, hence, minimising waste of resources,
• Restrictions on trade will reduce gains from free trade.

• PPFs r linear,
• Exchange rates must be within respective domestic opportunity cost ratios. Greater difference btw opportunity costs, greater potential for trade.
• No transport costs r charged.
• 2-country, 2-guds assumption is unrealistic.
• Production costs r unlikely to be constant. As countries specialise, they benefit from economies of scale.
• No restrictions on free trade
• Resources r mobile