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How Do Comparative Advantage and Absolute Advantage Contribute to Economic Growth?

Understanding Absolute and Comparative Advantage in Trade

When countries trade with each other, two important ideas help explain how they can grow economically: absolute advantage and comparative advantage.

  1. Absolute Advantage:
    A country has an absolute advantage when it can make something better and faster than another country, using fewer resources.
    For example, let’s say Country A can grow 10 tons of wheat using 5 hours of work. But Country B can only grow 5 tons of wheat in the same 5 hours. This means Country A has an absolute advantage in growing wheat because it can produce more with less effort.

  2. Comparative Advantage:
    A country has a comparative advantage when it can produce something at a lower cost compared to another country.
    Imagine if Country A gives up less of other products to grow wheat than Country B does. This means Country A has a comparative advantage in producing wheat, because it can focus on making wheat more efficiently than Country B.

  3. Trade Benefits:
    According to the World Bank, countries that trade with each other grow 1.5 times faster than those that don’t.
    When countries trade, they can increase their economy by 20% over ten years. This happens because they use their resources more wisely.

In short, when countries focus on exporting things they can make better and cheaper, they boost their economic growth.

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How Do Comparative Advantage and Absolute Advantage Contribute to Economic Growth?

Understanding Absolute and Comparative Advantage in Trade

When countries trade with each other, two important ideas help explain how they can grow economically: absolute advantage and comparative advantage.

  1. Absolute Advantage:
    A country has an absolute advantage when it can make something better and faster than another country, using fewer resources.
    For example, let’s say Country A can grow 10 tons of wheat using 5 hours of work. But Country B can only grow 5 tons of wheat in the same 5 hours. This means Country A has an absolute advantage in growing wheat because it can produce more with less effort.

  2. Comparative Advantage:
    A country has a comparative advantage when it can produce something at a lower cost compared to another country.
    Imagine if Country A gives up less of other products to grow wheat than Country B does. This means Country A has a comparative advantage in producing wheat, because it can focus on making wheat more efficiently than Country B.

  3. Trade Benefits:
    According to the World Bank, countries that trade with each other grow 1.5 times faster than those that don’t.
    When countries trade, they can increase their economy by 20% over ten years. This happens because they use their resources more wisely.

In short, when countries focus on exporting things they can make better and cheaper, they boost their economic growth.

Related articles