Theories of Foreign Trade: Absolute Advantage

Trade is based on absolute advantage.

Both nations can gain by specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage.

Canada is efficient in growing wheat but inefficient in growing bananas.

<p>Resources are utilized in the most efficient way.</p> Signup and view all the answers

<p>The gains from specialization in production are available to be divided between the two nations through trade.</p> Signup and view all the answers

<p>A nation is more efficient in producing one commodity but less efficient in producing another, leading to gains from trade by specializing in the production of the commodity of its absolute advantage.</p> Signup and view all the answers

<p>It ensures that resources are utilized in the most efficient way by allowing each nation to specialize in the production of the commodity of its absolute advantage.</p> Signup and view all the answers

<p>Canada, being efficient in growing wheat but inefficient in growing bananas, can benefit by specializing in wheat production and trading with Nicaragua, which is efficient in growing bananas but inefficient in growing wheat.</p> Signup and view all the answers

<p>Absolute advantage allows for gains from specialization in production, as each nation specializes in the production of the commodity of its absolute advantage, leading to an increase in the output of both commodities through trade.</p> Signup and view all the answers

<p>It allows both nations to specialize in the production of the commodity of their absolute advantage, leading to gains from trade through the exchange of their respective outputs.</p> Signup and view all the answers