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By the end of this subtopic, you should be able to:
Countries around the world are good at producing different things. Some countries have fertile land perfect for farming; others have advanced technology for manufacturing. Instead of trying to produce everything themselves, countries specialise — they focus on making the things they are best at — and then trade with other countries for everything else.
Two important theories help us understand which country should produce what: Absolute Advantage and Comparative Advantage.
A country has an absolute advantage when it can produce more of a good than another country using the same amount of resources (e.g. the same number of workers). In other words, it is simply more efficient at producing that good.
Example:
Suppose Country X and Country Y each have 100 workers, split equally (50 on each good):
| Country | Food produced | Clothing produced |
|---|---|---|
| Country X | 30 units | 15 units |
| Country Y | 10 units | 20 units |
| World Total | 40 units | 35 units |
After specialisation (each country uses all 100 workers on what they're best at):
| Country | Food produced | Clothing produced |
|---|---|---|
| Country X | 60 units | 0 units |
| Country Y | 0 units | 40 units |
| World Total | 60 units | 40 units |
World output rises from 40+35=75 units to 60+40=100 units. Both countries can trade and end up with more than before. This is the key benefit of specialisation.
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