Final answer:
Absolute advantage refers to the ability to produce more using the same resources, while comparative advantage refers to lower opportunity cost in production. Gains from trade occur when countries specialize based on their comparative advantage and engage in trade, leading to increased productivity and more choices for consumers.
Step-by-step explanation:
Absolute Advantage:
Absolute advantage refers to the ability of a country, individual, or business to produce a higher quantity of goods or services using the same amount of resources. For example, if Country A can produce 10 cars in the same time it takes Country B to produce 5 cars, then Country A has an absolute advantage in car production.
Comparative Advantage:
Comparative advantage refers to the ability of a country to produce a good or service at a lower opportunity cost compared to other countries. Opportunity cost is the value of the next best alternative foregone when making a decision. For example, if Country C can produce 1 car by giving up the production of 2 refrigerators, while Country D can produce 1 car by giving up the production of 3 refrigerators, Country C has a comparative advantage in car production.
Gains from Trade:
When a country specializes in the production of goods or services in which it has a comparative advantage and engages in trade with other countries, it can benefit from gains from trade. Specialization allows countries to allocate their resources more efficiently and produce more of the goods or services in which they have a comparative advantage. This leads to increased productivity, output, and overall economic growth. Trade allows countries to obtain goods and services that they may not be able to produce or produce at a higher cost domestically, resulting in more choices and higher standards of living for consumers.
Even if a country has an absolute advantage in all goods, there can still be gains from trade. This is because trade is based on comparative advantage, not absolute advantage. When countries specialize based on their comparative advantage and trade with each other, they can still benefit from lower opportunity costs, increased productivity, and a wider variety of goods and services available in the market.