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The theory of comparative advantage is a surprisingly common-sense idea, but it is often misunderstood. In this technical note, the basic theory of comparative advantage is presented with an example that drives home its logic when there are technological differences between countries. In addition, we look at some extensions that specify other sources of comparative advantage, as well as some related theories.
The learning objectives are to refresh key concepts and tools from microeconomics and macroeconomics; to emphasize the role of economics in the MBA curriculum; and to show how analyzing economic agents as maximizers of profit and/or utility deepens one’s understanding of the environment of the firm.