Chapter 2, Problem 5P

To determine

How the absolute and comparative advantage affect the trade between EU and US

Concept Introduction:

Opportunity Cost: It is the next best option available to a person. Opportunity cost refers to the benefits which are given up in the process of obtaining current result.

Production Possibility Frontier (PPF): It is defined as the combination of all goods that can be manufactured efficiently with the available resources. It is also called production possibility curve. It may be increasing decreasing or constant in nature.

Comparative Advantage: In a trade a country has comparative advantages in producing goods when the opportunity cost of producing that good is less in comparative to the nation with which it is trading.

Absolute Advantage: It is the capacity of a nation, firm or individual to produce output at very low cost per unit in comparison to other entity that produces same output.