1.3 Comparative Advantage and Gains from Trade

a. Define absolute advantage and comparative advantage. b. Determine (using data from PPCs or tables as appropriate) absolute and comparative advantage.

• Absolute advantage describes a situation in which an individual, business, or country can produce more of a good or service than any other producer with the same quantity of resources.
• Comparative advantage describes a situation in which an individual, business, or country can produce a good or service at a lower opportunity cost than another producer.
• Enduring understanding MKT-1: Production and consumption increase by engaging in trade.

a. Explain (using data from PPCs or tables as appropriate) how specialization according to comparative advantage with appropriate terms of trade can lead to gains from trade. b. Calculate (using data from PPCs or tables as appropriate) mutually beneficial terms of trade.

• Production specialization according to comparative advantage results in exchange opportunities that lead to consumption opportunities beyond the PPC.
• Comparative advantage and opportunity costs determine the terms of trade for exchange under which mutually beneficial trade can occur.
• Enduring understanding MKT-1: Production and consumption increase by engaging in trade.