Comparative advantage between countries

Nations gain from trade when they specialize in the lower-opportunity-cost good.

Learning goals

Compute opportunity costs from an output table.
Identify mutually beneficial terms of trade.

Explanation

A country can have absolute advantage in both goods and still gain from trade. What matters is relative cost. If one country gives up less of good A to make good B, it should lean toward B and import A.

Terms of trade must sit between the two countries’ opportunity costs. If a deal asks more than a country would give up at home, it will not trade. If it asks less, both sides can be better off than under self-sufficiency.

Key terms

Absolute advantage. The ability to produce more of a good with the same resources, or the same good with fewer resources.
Terms of trade. The rate at which one good exchanges for another between trading partners.

Common mistakes

Refusing trade because one country is better at everything.
Picking terms of trade outside both opportunity-cost ratios.

Practice

Original Marlow Works items. Check the answer explanation after you try.

1 of 2Economic Indicators and the Business Cycle · easy · multiple choice

Nominal GDP rises from one year to the next while real GDP is unchanged. Which interpretation is best?

Original Marlow Works item — not a College Board question.

Take your time—this is practice, not a test.

Answer explanation

Why must the trade price lie between the two opportunity costs?

Answer. Each country must do better than producing the imported good at home.

Outside that range, one side is better off staying self-sufficient.

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Related resources

External links with reuse status. Marlow Works is independent and does not copy restricted exam or textbook material.

Official / link only
FRED economic data
Federal Reserve economic data. Terms vary by series; do not scrape or ingest.
Federal Reserve Bank of St. Louis · Varies by series · accessed 2026-10-01
Open source