Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners . The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production.
What is the law of comparative advantage in economics?
Comparative advantage is the ability of one party to manufacture goods and/or produce services at a lower opportunity cost than another party . In economics, the term is often applied to entire nations and their economies.
What is an example of a comparative advantage?
Comparative advantage is what you do best while also giving up the least . For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. That’s because you’ll make more money as a plumber.
Who has comparative advantage example?
Taking this example, if countries A and B allocate resources evenly to both goods combined output is: Cars = 15 + 15 = 30; Trucks = 12 + 3 = 15, therefore world output is 45 m units. It is being able to produce goods by using fewer resources, at a lower opportunity cost, that gives countries a comparative advantage.
What is my comparative advantage?
A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else . Having a comparative advantage is not the same as being the best at something. In fact, someone can be completely unskilled at doing something, yet still have a comparative advantage at doing it!
What is an example of a country with a comparative advantage?
A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor. Chinese workers produce simple consumer goods at a much lower opportunity cost. The United States’ comparative advantage is in specialized, capital-intensive labor.
What are the four main sources of comparative advantage?
Comparative advantage is determined by a country’s resources, that is the land, labour, capital and enterprise .
Why can’t a country have comparative advantage in both goods?
In international trade, no country can have a comparative advantage in the production of all goods or services. In economic terms, a country has a comparative advantage when it can produce at a lower opportunity cost than that of trade partners.
What is theory of comparative cost?
The principle of comparative costs is based on the differences in production costs of similar commodities in different countries . Each country specialises in the production of that commodity in which its comparative cost of production is the least. ...
How do you know who has comparative advantage?
To calculate comparative advantage, find the opportunity cost of producing one barrel of oil in both countries . The country with the lowest opportunity cost has the comparative advantage.
Which country has a comparative advantage in producing cars?
Japan has a comparative advantage in producing cars, since it has a lower opportunity cost in terms of grain given up.
What is an example of an absolute advantage?
A clear example of a nation with an absolute advantage is Saudi Arabia , The ease with which oil is extracted which greatly reduces the cost of extraction is its absolute advantage over other nations.
Which scenario is the best example of an opportunity cost?
The correct answer is a. A computer company produces fewer laptops to meet tablet demand . Opportunity cost defines the benefit obtained by having a commodity after forgoing some other commodity. In the problem statement, the computer company incurs an opportunity cost of laptops for tablets.
What is the difference between absolute advantage and comparative advantage with examples?
Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better. Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production diversification.
What is the importance of comparative advantage?
The benefit of comparative advantage is the ability to produce a good or service for a lower opportunity cost . A comparative advantage gives companies the ability to sell goods and services at prices that are lower than their competitors, gaining stronger sales margins and greater profitability.
When a country has a comparative advantage in the production of a good?
Transcribed image text: When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner . Then the country will specialize in the production of this good and trade it for other goods.
