Introduction

The first concepts to learn in international finance are absolute advantage and comparative advantage. If Country A can make more of an item, make the item faster, or use fewer resources to make it, it has an absolute advantage because it can produce a product better than Country B. What you will learn is it might not be in the best interest of the rest of the world for Country A to produce that particular item.

You learned about opportunity cost in a previous lesson. Opportunity cost is what is given up when someone produces an item, not what it costs specifically to make the item. The most important concept in international trade is comparative advantage. Comparative advantage simply means that a country should produce an item if they have the lowest opportunity cost.

This lesson will focus on the winners and losers of international trade. Even though someone can produce an item at a low cost, they might not produce the item if they don't have the lowest opportunity cost. The players in the concept of comparative advantage are the domestic consumers, domestic producers, and the foreign producers. Given a particular problem you will see who the winners and losers are for each individual situation.

 

Lesson Objectives

Following successful completion of this lesson, students will be able to:

  • determine the opportunity cost for a person or country producing two items.
  • define and determine absolute advantage.
  • determine which country or person has a comparative advantage over another.
  • describe the gains from specialization and trade.
  • determine whether or not two nations or individuals should trade depending on the terms of trade and opportunity costs.

The above objectives correspond with the Alabama Course of Study: Economics objectives: 12, 12.1, 12.2

 

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