Absolute vs. Comparative Advantage
Why parties gain from trade even when one is better at everything, opportunity cost does the work.
The Absolute vs. Comparative Advantage model, in writing
Definition
A producer has comparative advantage in a good when they can make it at a lower opportunity cost than anyone else, even if they're worse at producing everything (absolute disadvantage).
Specialize where: opportunity cost of X = (units of Y forgone) / (units of X gained) is lowest
The intuition
A lawyer who types faster than her assistant should still hire the assistant, every hour typing costs her an hour of legal fees. Trade lets everyone shift hours toward their cheapest-to-produce good, and total output rises without anyone working more.
Exam tip
Compute each producer's opportunity cost for BOTH goods first; the numbers must be reciprocals, so nobody can have comparative advantage in both.
Related models in Micro Foundations