differenciate absolute advantage and comparative advantage?

Answer 1

Absoute advantage is the ability of someone to produce something using fewer resources (labor, capital, land, etc.) than anyone else.

It is important to distinguish absolute from comparative advantage, since it is comparative advantage that determines the potential welfare gains from specialization and trade, and not absolute advantage.

Comparative advantage:
The idea here is simple and intuitive. If our country can produce some set of goods at lower cost than a foreign country, and if the foreign country can produce some other set of goods at a lower cost than we can produce them, then clearly it would be best for us to trade our relatively cheaper goods for their relatively cheaper goods. In this way both countries may gain from trade.

To benefit from specialization and free trade, country A should specialize and trade the good in which it is "most best" at producing, while Country 2 should specialize and trade the good in which it is "least worse" at producing.

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