3.2 Comparative Advantage: The Driving Force of Specialization

3.2 a. Absolute Advantage

Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that same good or service. ^[5]

Example: China and other Asian countries are known to have an absolute advantage with manufactured goods, because they can take advantage of low unit labor costs. ^[5]

^{Comparative advantage [6]}

3.2 b. Comparative Advantage

Concept in economics that a country should specialize in producing and exporting only those goods and services which it can produce more efficiently (at lower opportunity cost) than other goods and services (which it should import). ^[7]

Example: A country specializes in textiles, which it exports, and relies on imports for technical products which it cannot produce.

^{Comparative Advantage [8]}

3.2 c. Comparative Advantage and Trade

Trade allows specialization based on comparative advantage and thus undoes this constraint, enabling each economy to consume more than it can produce. ^[9]

Example: To produce the wine in Portugal, might require only the labor of 80 men for one year, and to produce the cloth in the same country, might require the labor of 90 men for the same time. It would therefore be advantageous for Portugal to export wine in exchange for cloth. ^[10]

^{Specialization and Trade [11]}