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Comparative Advantage Vs. Absolute Advantage

CFA® Exam, CFA® Exam Level 1, Foreign Exchange

This lesson is part 2 of 7 in the course International Trade and Capital Flows

In international trade, companies can have absolute and comparative advantage in producing goods and services over other countries.

A country has absolute advantage in producing goods if it is able to produce goods at a lower cost in terms of resources compared to other countries.

On the other hand, the country that can produce a product at the lowest opportunity cost, compared to producing other products, has a comparative advantage in that specific product.

As long as different countries have different opportunity costs of producing different goods, there are gains to be made in international trade.

The following two videos from Khan Academy explain the concept of comparative advantage and absolute advantage with the help of examples.

The first video explains how two parties can get better outcomes by specializing in their comparative advantage and trading.

The second video explains that a party benefits from trade as long as there is a comparative advantage and not necessarily an absolute advantage.

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‹ Benefits and Costs of International Trade

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Ricardian and Heckscher-Ohlin Models of International Trade ›

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In this Course

  • Benefits and Costs of International Trade
  • Comparative Advantage Vs. Absolute Advantage
  • Ricardian and Heckscher-Ohlin Models of International Trade
  • Trade and Capital Restrictions
  • Trading Blocs, Common Markets, and Economic Unions
  • Balance of Payments Accounts
  • Role of International Organizations (IMF, World Bank, and WTO)

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