Absolute advantage is the source of the potential gains from

Absolute advantage is the source of the potential gains from specialization and trade.... true or false?

Solution

False

Not absolute advantage, but comparative advantage is the source of potential gains from specialization and trade.

Absolute advantage refers to the ability of one country to produce more than the other country using the same resources. It only takes into account the quantitative difference of production between the two countries.

Comparative advantage, on the other hand refers to the ability of one country to produce a good at a lower (opportunity) cost than other country.

Gains from trade occur only when a country has comparative advantage and exports goods in which it has comparative advantage. This will make trade profitable. Countries which produce goods at lower cost export it and import the good in which the other country has lower cost. If trading was only on the basis of absolute advantage, then profits will not be able to be made because opportunity cost will be ignored.