Absolute and

comparative
advantage
Terms of Trade
 ABSOLUTE ADVANTAGE
https://www.investopedia.com/terms/a/absoluteadvantage.asp
ABSOLUTE ADVANTAGE
• Absolute advantage is when a producer can produce a good or service in
greater quantity for the same cost.
• Absolute advantage can be the basis for large gains from trade between
producers of different goods with different absolute advantages.
• By specialization, producers with different absolute advantages can
always gain over producing in isolation.
• Absolute advantage is related to comparative advantage, which can open
up even more widespread opportunities for the division of labor and
gains from trade.
WHO HAS THE ABSOLUTE ADVANTAGE IN FISH?

WHO HAS THE ABSOLUTE ADVANTAGE IN PINEAPPLES?

COUNTRY A 15 FISH 30 PINEAPPLES

COUNTRY B 20 FISH 60 PINEAPPLES

WHO HAS THE ABSOLUTE ADVANTAGE IN FISH?

COUNTRY B

WHO HAS THE ABSOLUTE ADVANTAGE IN PINEAPPLES?

COUNTRY B

COUNTRY A 15 FISH 30 PINEAPPLES

COUNTRY B 20 FISH 60 PINEAPPLES

 WHAT IS THE OPPORTUNITY COST FOR
PRODUCING ONE OF EACH PRODUCT?

NOTE:
Per unit opportunity cost C/G
COUNTRY A COUNTRY B

FISH 15 20
1 F = 30/15 =2 P 1 F = 60/20 = 3P

PINEAPPLES 30 60
1 P = 15/30 = ½ F 1 P = 20/60=1/3 F
Comparative
Advantage
Terms of Trade
David Ricardo (1772–1823) was a
classical economist best known for
his theory on wages and profit, labor
theory of value, theory of 
comparative advantage, and theory
of rents. David Ricardo and several
other economists also
simultaneously and independently
discovered the 
law of diminishing marginal returns.
His most well-known work is
the Principles of Political Economy
and Taxation (1817).
.
 COMPARATIVE ADVANTAGE

https://www.investopedia.com/terms/c/comparativeadvantage.asp
COMPARATIVE ADVANTAGE
•  When a producer has a lower opportunity cost to produce a good or
service than another producer. 
• Comparative advantage is an economy's ability to produce a particular
good or service at a lower opportunity cost than its trading partners.
• The theory of comparative advantage introduces opportunity cost as a
factor for analysis in choosing between different options for production.
• Comparative advantage suggests that countries will engage in trade with
one another, exporting the goods that they have a relative advantage in.
 Who has a comparative advantage in
fish?

Who has a comparative advantage in

pineapples?

COUNTRY A COUNTRY B

FISH 15 20
1 F = 30/15 =2 P 1 F = 60/20 = 3P

PINEAPPLES 30 60
1 P = 15/30 = ½ F 1 P = 20/60=1/3 F
 Who has a comparative advantage in
fish?
COUNTRY A
Who has a comparative advantage in
pineapples?
COUNTRY B

COUNTRY A COUNTRY B

FISH 15 20
1 F = 30/15 =2 P 1 F = 60/20 = 3P

PINEAPPLES 30 60
1 P = 15/30 = ½ F 1 P = 20/60=1/3 F
 TERMS OF TRADE
Trade is a basic economic concept involving the buying and
selling of goods and services, with compensation paid by a
buyer to a seller, or the exchange of goods or services between
parties. Trade can take place within an economy between
producers and consumers. 

International trade allows countries to expand markets for both

goods and services that otherwise may not have been available
to it. It is the reason why an American consumer can pick
between a Japanese, German, or American car. As a result of
international trade, the market contains greater competition and
therefore, more competitive prices, which brings a cheaper
product home to the consumer.
 What is the term of trade that
benefit both?

1 fish for __2.5_____pineapples

COUNTRY A COUNTRY B

FISH 15 20
1 F = 30/15 =2 P 1 F = 60/20 = 3P

PINEAPPLES 30 60
1 P = 15/30 = ½ F 1 P = 20/60=1/3 F
 What is the term of trade that
benefit both?
1 fish for __2.5_____pineapples

Any number greater than 2 less

than 3
COUNTRY A COUNTRY B

FISH 15 20
1 F = 30/15 =2 P 1 F = 60/20 = 3P

PINEAPPLES 30 60
1 P = 15/30 = ½ F 1 P = 20/60=1/3 F
Output questions state that you get a certain
amount of product out of a given input.
 Examples miles per gallon, pieces of gum per
dollar... C/G
Input questions state that it takes a certain
amount of input to get a given product.
 Examples are hours to do a job, apples to make a
pie,

 Per unit opportunity cost is G/C

 Input question
G/C

  COUNTRY A COUNTRY B
Fish 15 hrs 20 hrs

Pineapple 30 hrs 60 hrs

 Input question
G/C

  COUNTRY A COUNTRY B
Fish 15 hrs 20 hrs
1 F = 15/30=1/2 P 1 F = 20/60 = 1/3 P

Pineapple 30 hrs 60 hrs

1 P = 30/15 = 2 F 1 P = 60/20= 3 P
1. What is the opportunity cost for producing one of each
product?
2. Who has a comparative advantage in fish?
3. Who has a comparative advantage in pineapples?
4. What is the term of trade that benefit both?
1 fish for _______pineapples
1. Who has a comparative advantage in fish? Country B
2. Who has a comparative advantage in pineapples? Country A
3. What is the term of trade that benefit both?
1 fish for ___2.5____pineapples
1. What is the opportunity cost for producing one of each
product?
2. Who has a comparative advantage in each product?
3. What is the term of trade that benefit both?
4. What is the absolute advantage of each scenario?

 
Country A 20 bikes, 2 basketballs
Country B 12 bikes, 2 basketballs
 
 Country A 4 pizza, 12 hotdogs
Country B 1 pizza, 5 hotdogs

 Country A 20hrs TV, 2hrs Salsa

Country B 12 hrs TV, 2hrs Salsa

Country A 4 hrs car, 12 hrs plane

Country B 1 hr car, 5 hrs plane
 COUNTRY A B
BIKES 20(1bikes=2/20=1/10) 12(1b=2/12=1/6)
BASKETBALL 2(1bask=20/2=10) 2(1b=12/2=6)

TERMS OF TRADE1 basketball for any number between 6 and10

COUNTRY A B
PIZZA 4(1P=12/4=3H) 1(1P=5H)
HOTDOG 12(1H=4/12=1/3P) 5(1H=1/5P)
TERMS OF TRADE 1PIZZA FOR ANY NUBER BETWEEN 3 AND 5 HOTDOGS
 COUNTRY A B
TV 20(1T=20/2=10) 12(1T=12/2=6)
SALSA 2(1S=2/20=1/10) 2(1S=2/12=1/6)
TERMS OF TRADE IS ANY NUMBER BETWEEN 6 AND 10

COUNTRY A B
CAR 4(1C=4/12=1/3P) 1(1C=1/5P)
PLANE 12(1P=12/4=3C) 5(1C=5C)

TERMS OF TRADE IS 1 PLANE FOR ANY NUMBER BETWEEN 3 AND 5