Reasons for Trade: Absolute & Comparative Advantage

Reasons for Trade: Examples of Absolute and Comparative

Advantage

Table 1: Production of hardware and software products by Utopia and Happyland

Happyland’s absolute advantage

Table 1: Production of hardware and software products by Utopia and Happyland

Utopia’s absolute advantage

Table 1: Production of hardware and software products by Utopia and Happyland

PP

Cs

Utopia’s comparative advantage

Hardware

Software

Utopia 200 1000

Happyland 100 150

0

1 unit Hardware = 5 units Software

1 unit Hardware = 15 units Software

Happyland’s comparative advantage

Hardware

Software

Utopia 200 1000

Happyland 100 150

0

1 unit Software = 0.2 units Hardware

1 unit Software = 0.06 units Hardware

Reasons for T

rade

Before SpecializationA = 100 Hardware and 500 Software

After SpecializationB = 200 Hardware

After Trading 100 Hardware for 900 Software C = 100 Hardware & 900 Software

Reason for T

radce

Before SpecializationX = 50 Hardware and 750 Software

After SpecializationY = 1500 software

After Trading 750 Software for 83 HardwareZ = 83 Hardware & 750 Software