Comparative advantage, absolute advantage, specialization and trade

As people specialize in what they are interested and/or good in they engage in trade for the items they demand.


People that engage in trade achieve certain gains. Understanding how and why people trade is of vital interest to economists.

All of us engage in trade. Working to earn an income provides us with money and in turn provides us the means to engage in TRADE. We simply calling the buying and selling of goods and services.


When we concentrate on producing a good or service that is demanded we know that people will want to purchase that good. Duffka produces education and in turn purchases services and goods.


In Duffka's attempt to produce education he produces a service the community demands. Almost all of Duffka's classes are to help him SPECIALIZE in education. When people specialize in one good or service they trade with people who specialize as well.


An individual/firm/nation has an absolute advantage in producing a good or service if he or she can make more of it with a given amount of time and resources. An absolute advantage is just a quick look at who is more efficient. The definition does NOT assume trade and there is NO analysis of opportunity cost.

Example: The United States can make 14 cars in 100 hours. South Korea can make 12 cars in 100 hours. The USA has an absolute advantage in the production of cars.


An individual/firm/nation has a comparative advantage in the production of a good or service if the opportunity cost is lower for that individual/firm/nation than for the individual that is COMPARED.

POINT OF EMPHASIS--Lower opportunity cost.

*There cannot be a comparative advantage without a COMPARISON to another entity.