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What is the basis for trade: absolute advantage or comparative advantage? How can an individual or a country gain from specialization and trade?
Comparative advantage is the basis of trade. An individual or country can gain from trade by producing extensively a particular good or servorting it and importing other goods and services at a cost lower than the cost the country woulditself produce.
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Let's talk about trade. First of all, let's start with the basis for trade. Now the basis for trade is comparative advantage. Now you have comparative advantage in good X. If you have the lower opportunity cost of making good X, this means that it would cost you less to make good X. Now, why do we trade? Well, if you specialize on a particular good, you can maximize a production of that one. Good, right? You're just focusing on that one good. And you become really good at making it. Ah, a different country then can specialize on a different good and again they'll maximize their production on it. Well, if these two countries then trade at a rate that benefits both, they might reach a combination of goods under PPF that was not feasible before. That's why comparative advantage leads to benefit
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