Global Economics and Trade Advantages. Now, international trade enhances economic growth for all countries because it increases the efficiency of resources and how they're allocated, and this provides for a larger capital pool and markets for specific products. Now, countries can have one of two types of advantages in producing specific products. First, it could be an absolute advantage or it can be a comparative advantage. Now let's go through these in a little bit more detail. What's an absolute advantage? Well, an absolute advantage is a difference in productivity levels between countries. Well, that's related to the cost of production. So a country has an absolute advantage if it can produce Product X at a lower price than other countries. Now, let's say comparative advantage, it's similar, but it focuses on opportunity costs of production. Here, a country has a comparative advantage only if the opportunity cost of producing that product is less than other countries, and we'll go through an example in a minute. But a key takeaway here is an absolute advantage is always the low cost producer, but in a comparative advantage, that's not necessarily the case. In fact, it's quite possible to have a comparative advantage in producing a product while not having an absolute advantage in producing that same product. And here is our example. Here we have two countries, both producing two products, Product X and Product Y. Now, if we look closely at the cost of production, we can see that Country 1 has an absolute advantage in both products. It costs them less to produce both X and Y. However, if we look at opportunity costs, we can see that Country 1 only has a comparative advantage in Product X. While Country 2 has a comparative advantage in producing Product Y. And we determine that by calculating the relative cost of producing Product Y versus X and X versus Y. Now, let's take a look at how things would work in a trade environment and a no trade environment. First scenario, we're looking at a scenario with no trade between countries. Both countries produce Product X and Product Y and we can see the level of resources that that would require. Thousand dollars for Country 1, $1,300 for Country 2, and a total amount of resources used of 2,300. Now, let's mix in trade. Here, Country 1 produces all of Product X while Country 2 produces all of Product Y and then they trade based upon their needs and their resources. Again, the same amount of resources are used in the no trade and with trade scenarios, both a sum of $2,300. But the key difference here is the amount of quantity Y. Using the same amount of resources, both countries are able to acquire four more units of Product Y because of the benefits of trade. Now in global economics, countries tend to specialize in the goods and services for which they have a comparative advantage and all countries participating in that trade can benefit similar to this example that we just showed you. Now, where does the source of comparative advantages come from? Well, they generally come from labor productivity. And labor productivity is attributed to differences in technology. As countries develop technologies that create a comparative advantage in producing certain products, they shift their resources in that direction and then they fill their needs for other products through trade.
