![]() We explore it with the help of the example developed in Figures 15.1 and 15.2. This is a remarkable result, and much less intuitive than the principle of absolute advantage. This is termed the principle of comparative advantage, and it states that even if one country has an absolute advantage in producing both goods, gains to specialization and trade still materialize, provided the opportunity cost of producing the goods differs between economies. It is frequently a surprise to students that this situation has the capacity to yield consumption advantages to each economy, even though one is absolutely more efficient in producing both of the goods. In international trade language, there exists a comparative advantage as well as an absolute advantage. In this instance it is assumed that one economy has an absolute advantage in both goods, but the degree of that advantage is greater in one good than the other. So, let us now consider two economies with differing production capabilities, as illustrated in Figures 15.1 and 15.2. Remember: The opportunity cost of a good is the quantity of another good or service given up in order to have one more unit of the good in question. Technically, we could replace Amanda and Zoe with Argentina and Zambia, and nothing in the analysis would have to change in order to illustrate that consumption gains could be attained by both Argentina and Zambia as a result of specialization and trade. This set-up could equally well be applied to two economies that have different efficiencies and are considering trade, with the objective of increasing their consumption possibilities. In that example it was assumed that individual A had an absolute advantage in producing one product and that individual Z had an absolute advantage in producing the second good. The simple example we developed illustrated that, where individuals differ in their efficiency levels, benefits can accrue to each individual as a result of specializing and trading. In the opening chapter of this text we emphasized the importance of opportunity cost and differing efficiencies in the production process as a means of generating benefits to individuals through trade in the marketplace. ![]()
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