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When a nation can make a product at a higher quality and faster rate than another, it has an absolute advantage. Comparative advantage is based on opportunity cost, which is the benefit one forfeits by choosing an alternative option. If one nation has a lower opportunity cost than another to produce a good, it has a comparative advantage.

Let’s say that France and Italy have enough resources to make wine or cheese, but not both. France can make 20 units of wine or 10 units of cheese. Its opportunity cost of each unit of wine is half a unit of cheese, or 10 units of cheese divided by 20 units of wine. Its opportunity cost of cheese is 2 units of wine, or 20 divided by 10.

Italy can make 30 units of wine and 22 units of cheese, giving it an absolute advantage for both. Its opportunity cost for cheese is 1.36 units of wine, and its opportunity cost of wine is 0.73 units of cheese.

France has a comparative advantage for producing wine. Italy has the comparative advantage with cheese.

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