Isn't free trade good for two countries even if one of them has an absolute advantage (in terms of low costs and productivity) in all goods and services produced?© BrainMass Inc. brainmass.com October 9, 2019, 5:04 pm ad1c9bdddf
In economics, the theory of comparative advantage explains why it can be beneficial for two countries to trade, even though one of them may be able to produce every kind of item more cheaply than the other. What matters is not the absolute cost of production, but rather the ratio between how easily the two countries can produce different kinds of things. When one entity (be it a firm or a country) is able to produce more efficiently than another entity it has an absolute advantage; that is, assuming equal inputs, the entity with an absolute advantage will have a greater output.
Even if a country has an "absolute advantage" in both industries, it may be x many times more productive than another one and only y times more productive in the other industry, where x is greater than y. In a competitive market, the price of goods reflects the cost of making them, so it is likely that in the country having absolute advantage in both the industries, it costs more to make one unit of one ...
Briefly summarize the theory of comparative advantage.