Determining Absolute and Comparative Advantage

Why do nations stand to gain from trading with one another, and how should a nation determine the goods it should specialize in and which it should import? To answer these questions we must introduce some basic concepts of International Trade: absolute and comparative advantage. This lesson introduces these two concepts and uses a simple PPC model to determine how two countries should allocate their resources towards the production of a particular good to maximize the benefit they derive from trading with one another.

In the next lesson we’ll learn how to illustrate the potential gains from trade in the PPC diagram.