1. Reasons for Trade: Absolute & Comparative Advantage
Absolute Advantage
The ability to produce a particular good with fewer resources than another country.
Comparative Advantage
The ability to produce a particular good at a lower opportunity cost than another country.
There are two ways to compare the abilities of two people, two firms or two economies producing a good.
The person who can produce a good with a smaller quantity of inputs has an absolute advantage.
The person with a smaller opportunity cost has a comparative advantage.
This video by “pajholden” does a very job at explaining how nations can have a comparative advantage: 1

2. Reasons for Trade: Examples of Absolute and Comparative Advantage
Hardware
Software
Utopia
200
1000
Happyland
100
1500
HL Students need to bef able to understand a numerical examples of comparative advantage.
The site Turor2u provides another example.
(See
Will most definitely be on exam
Table 1: Production of hardware and software products by Utopia and Happyland 2

3. Happyland’s absolute advantage
Hardware
Software
Utopia
200
1000
Happyland
100
1500
Table 1: Production of hardware and software products by Utopia and Happyland 3

4. Utopia’s absolute advantage
Hardware
Software
Utopia
200
1000
Happyland
100
1500
Table 1: Production of hardware and software products by Utopia and Happyland 4

5. PPCs 5

6. Utopia’s comparative advantage
Hardware
Software
Utopia
200
1000
Happyland
100
1500
1 unit Hardware = 5 units Software
Utopia
1 unit of hardware = 5 units of software
(200 /200 = 1000/200)
Happlyland
1 unit of hardware = 15 units of software
(100/100 = 1500/100)
1 unit Hardware = 15 units Software 6

7. Happyland’s comparative advantage
Hardware
Software
Utopia
200
1000
Happyland
100
1500
1 unit Software = 0.2 units Hardware
Utopia
1 unit of software = 1/5 or 0.2 units of hardware
(1000/1000 = 200/1000)
Happyland
1 unit of software = 1/15 or .06 units of hardware
( = 1500/1500 = 100/1500)
1 unit Software = 0.06 units Hardware 7

8. Reasons for Trade Before Specialization
Utopia
1 unit of software = 1/5 or 0.2 units of software
(1000/1000 = 200/1000)
Happyland
1 unit of software = 1/15 or .06 units of software
( = 1500/1500 = 100/1500)
Before Specialization
A = 100 Hardware and 500 Software
After Specialization
B = 200 Hardware
After Trading 100 Hardware for 900 Software
C = 100 Hardware & 900 Software 8

9. Reason for Tradce Before Specialization
Utopia
1 unit of software = 1/5 or 0.2 units of software
(1000/1000 = 200/1000)
Happyland
1 unit of software = 1/15 or .06 units of software
( = 1500/1500 = 100/1500)
Before Specialization
X = 50 Hardware and 750 Software
After Specialization
Y = 1500 software
After Trading 750 Software for 83 Hardware
Z = 83 Hardware & 750 Software 9