[PDF] assume that there are two nations alpha and beta

  • Can two countries achieve gains from trade?

    True; two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods. All that is necessary is that each country have a comparative advantage in some good.

  • When two countries specialize and trade?

    When countries specialize and trade, they can move beyond their production possibilities frontiers, and are thus able to consume more goods as a result.

  • What is an example of a comparative advantage?

    the ability to produce a good at a lower opportunity cost than another entity. For example, for every pillow Owen embroiders his opportunity cost is 2 scarves knitted, while Penny must forego 3 scarves for every pillow she embroiders, so Owen has comparative advantage in embroidering pillows.
  • A contemporary example: China's comparative advantage with the United States is in the form of cheap labor. Chinese workers produce simple consumer goods at a much lower opportunity cost. The United States' comparative advantage is in specialized, capital-intensive labor.
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