Future Business Leader Achievments (FBLA) Economics Practice Exam

Gains from trade can be achieved through which advantages?

1. Only absolute advantage

2. Only comparative advantage

3. Both comparative and absolute advantage

4. No advantages

The correct answer is: Both comparative and absolute advantage

Gains from trade are fundamentally derived from the concept of specialization and the advantages that different parties can leverage in trading scenarios. When individuals, firms, or countries focus on what they can produce most efficiently, they can trade with others to obtain goods or services that they cannot produce as efficiently themselves. Both absolute advantage and comparative advantage contribute to gains from trade. Absolute advantage refers to the ability of an entity to produce more of a good or service with the same amount of resources compared to others. Although this means that the entity is more efficient overall, it does not capture the benefits of trade as completely. Comparative advantage, on the other hand, refers to the capacity to produce a good or service at a lower opportunity cost than others. This concept is crucial for trade because it explains how even if one party holds an absolute advantage in producing all goods, they can still benefit from trading with another party that specializes in the good where they have a comparative advantage. Thus, gains from trade can be realized when both absolute and comparative advantages are present, allowing entities to focus on producing goods where they are most efficient and trading for those where they have less efficiency. This leads to a more optimal allocation of resources and overall increased production and consumption efficiency.