FIGURE 7 PRODUCTION POSSIBILITIES FOR THE UNITED STATES AND MEXICO
One country has an absolute advantage if it can produce more of a good than another country. In this case, the United States has an absolute advantage over Mexico in producing both silicon chips and crude oil—it can produce more of both goods than Mexico can. Even so, Mexico has a comparative advantage over the United States in producing oil, since it can increase its output of oil at a lower opportunity cost than can the United States. This comparative advantage leads to gains for both countries from specialization and trade.