The trade theory that first indicated importance of specialization in production and division of labor is based on the idea of theory of absolute advantage
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However, absolute advantage in the production of a commodity is neither necessary nor sufficient for mutually beneficial trade For example, a country may be
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A country or person can have an absolute advantage in both goods or activities, and yet still gain from trade by specializing in the good or activity in which
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To see why economists are so enthusiastic about free trade, let's see what economic theory tells us about this issue Absolute and Comparative Advantage
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Which set of countries has a comparative advantage for manufacturing low quality cars? 2 In Australia one unit of labor can produce 25 computers or 25 bushels
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Absolute advantage The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources
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To understand the economics of trade, you must be able to understand specialisation Countries specialise in things they can produce efficiently,
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