chapter  2
28 Pages

Comparative advantage —how nations can gain from international trade

ByJoseph P. Daniels, David D. VanHoose

This chapter provides how the possession of an absolute advantage in production of an item such as freshwater can sometimes provide a rationale for nations to engage in trade. It examines that relative differences in opportunity costs—which govern comparative advantage in the production of a good or service—much more commonly provide this rationale. The chapter emphasizes two key assumptions underlying examinations of production possibilities and opportunity costs. First, assumes the availability of a given technology in each nation considered. Second, assumes that each country had a fixed set of accessible resources. Given these two assumptions, every nation's production possibilities did not change during the time horizon to which the examples applied. Until the mid-twentieth century, many Nepalese village blacksmiths were able to export handcrafted copper containers to residents of other nations. These assumptions only applied to a short-run time horizon. Countries' production possibilities do not remain unchanged over time.