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    Comparative advantage vs. absolute advantage

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    Are there any similarities between the principle of comparative advantage and absolute advantage? Are there any differences between the two principles? What are the sources of comparative advantage? What the sources of absolute advantage? What is the basis for specialization? What is the gain from trade?

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    The Ricardo's comparative advantage theory stipulated that mutually beneficial trade between two countries can occur even when one nation has no absolute advantage in the production of all goods as compared to its trading partner. According to Ricardo in a two-country two-good model, each country can specialized in producing the good that it has comparative advantage then trade between them to maximize the benefit for both countries in terms of consumption of the two goods in question. On the other hand, in the Adam Smith's absolute advantage theory in order for the two countries to benefit from specialization and trade, each country should specialize in the production of the good that it has absolute advantage in terms of cost of ...

    Solution Summary

    Both the theories of comparative advantage and absolute advantage are based on factor productivity. The nation should specialize in producing the product that is the cheapest to produce (efficient). However, the two theories are differ in the sense that one look at the absolute advantage comparing to the trading partner in producing certain good and the other look at the comparative advantage of producing certain good in the country as compared to other goods.