1.Gains from trade
The gains from trade are the advantages that a country obtains as a result of trade.
-producers gain markets for their goods and services
-consumers can consume goods they would not have had without trade
-an exporting firm can expand production and achieve economies of scale
-The world gains from trade as each country can specialize in what it produces best
-consumers have access to better quality goods

2.Absolute advantage
-The principle states that a country has absolute advantage in the production of a good or service if it is the most efficient producer of the item. (They have the right conditions and resources to make the product or service) under the assumption everyone has the same basket of resources

How can each country benefit?
-Norway is better off devoting resources to fishing and using herring caught to trade for Guatemalan bananas (seeing as they don’t have the climate for green bananas but for herring)

Eg2:
Why does country X have an absolute advantage in the production of both goods?
-Country X can produce more rice (20 times) and more cloth (two and a half times) than country Y using the same amount of resources. Therefore country X has the absolute advantage in the production in both rice and cloth

3.Comparative advantage/cost
-The law of comparative advantage explains why trade is beneficial between two nations even if one of them has an absolute advantage in the production of goods and services.
-Comparative advantage occurs when a country can produce a good at the lowest opportunity cost when compared with other countries which have the same resources.
*The country with the lower opportunity cost of a good can produce that good at a cheap cost so they give it up to specialize in the other good. Hence why they import the opportunity cost good since they stop producing it in favor of the other good
*All tables are under the assumption half the resources go to each good in a country so the world output (since you give up one of the goods, you’d put that half of resources into the good the country will specialize in and times the output by two)
(further explained down in notes)

🤔Table 1

Calculation #1
Opportunity cost
-To produce 50 sheets of cloth country X must give up 100lbs of rice. Therefore opportunity cost of 1 sheet of cloth [(50/50)= 1 sheet] is
100/50=2lbs 2lbs of rice
-To produce 20 sheets of cloth, country Y must give up 5lbs of rice. Therefore opportunity cost of 1 sheet of cloth [(20/20)= 1 sheet]is
5/20=1/4=0.25 0.25 lbs of rice

Conclusion: Rice is cheaper in country Y because it has a lower opportunity cost and therefore has a comparative advantage in the production of cloth so country Y should specialize in cloth production and import rice.
[specialize in cloth because it’s cheaper to produce rice so they’d give up rice, meaning stop rice production, and concentrate its resources into cloth only. Hence import rice as they wouldn’t be producing any] and cloth would double output

Calculation #2
Opportunity cost
-To produce 100lbs of rice in country X must give up 50 sheets of cloth. Therefore opportunity cost of 1lb of rice [(100/100) = 1lb ]is
50/100=1/2 =0.5 sheets of cloth
-To produce 5lbs of rice, country Y must give up 20 sheets of cloth. Therefore the opportunity cost of 1lb of rice [ (5/5)= 1lb] is
20/5=4. =4 sheets of cloth

Conclusion: Cloth is cheaper in country X because it has a lower opportunity cost and therefore this country has a comparative advantage in the production of rice production and import cloth
[specialize in rice because it’s cheaper to produce cloth, so they’d give up cloth and concentrate the resources from cloth into rice production. Since they won’t produce cloth they’ll import it.]

Step 4

Steps in doing comparative advantage
1)Calculate
2)Identify the lower opportunity cost + say it has the comparative advantage of
3)Trade (mention what it should import or specialize in)
4)What is the world total?
Step 4 example: Since under the assumption you produce the goods in the original table with half the resources, the good the country is best at would be doubled in output since it would put all its resources towards it

🤔Table 2

Step 4

🤔Table 3

Step 4

🤔Table 4

Step 4

Absolute advantage vs Comparative advantage
A country has an absolute advantage when it’s the most efficient at producing a good compared to any other country, that is to say it has all the factors of production and climate suitable for the good. A country has comparative advantage when it has the lowest opportunity cost of producing a good compared to other countries. Absolute advantage looks at which country produces the most of a good whereas comparative advantage looks at which country has the lowest opportunity cost of producing a good (it deals with two goods not one), not which has the largest output.