1.4 — Comparative Advantage and Trade

Comparative advantage explains how individuals, businesses, or countries benefit from specializing in what they do best and trading for other goods or services. For a detailed explanation, refer to AP Macroeconomics Comparative Advantage and Trade.

Why do people trade?

1. Assume people didn’t trade. What things would you have to go without?
   1. Everything you don’t produce yourself! Clothes, car, cell phone, bananas, etc
   2. Everyone specializes in the production of goods and services and trades it to others
2. What would life be like if cities couldn’t trade with cities or states couldn’t trade with states?
   1. Limiting trade would reduce people’s choices and make people worse off
   2. More access to trade means more choices and a higher standard of living

Absolute and Comparative Advantage

• Absolute advantage: Producer that can produce the most output OR requires the least amount of inputs/resources
• Comparative Advantage: Producer with the lowest opportunity cost

Companies and countries should specialize in producing the goods that are cheaper for them to produce.

$\text{Per unit opportunity cost}=\frac{\text{opp cost}}{\text{units gained}}$