Absolute advantage and comparative advantage in economics, and how opportunity cost influences specialization and trade.
Absolute advantage refers to the ability of a person to produce more of a good or service in a given time frame compared to another person, while comparative advantage focuses on the opportunity cost of producing one good over another. Opportunity cost is vital in understanding these concepts as it helps determine which person or country should specialize in producing certain goods.
For example, if Country A can produce cars more efficiently than Country B but can produce fewer computers in comparison, Country A has an absolute advantage in cars but a comparative advantage in computers due to lower opportunity cost.
In international trade, two countries can mutually benefit when they specialize in producing goods where they have a comparative advantage and then trade to obtain goods with lower opportunity costs, leading to overall efficiency and increased productivity.
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