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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Actor: Firm, individual, nation, or other participant in the economy Opportunity Cost: The benefit that would have been received by taking the next best
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This is true despite the fact that Katz has an absolute advantage at both activities 2 Measuring the Gains from Trade: Frankel and Romer 1999 Theory clearly
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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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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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areas of production in which the country has absolute or comparative cost advantage compared to the rest of the world When the country's resources are
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promote specialization and, in turn, efficiency and comparative advantage As will be shown, comparative advantage c theory of absolute advantage
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