Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
Is comparative advantage the basis for trade?
A country that has an absolute advantage in producing all goods still stands to benefit from trade with other countries, since the basis of the gains for trade is comparative advantage , not absolute advantage. It is not possible for an individual or country to have a comparative advantage in all goods.
Why does most trade occur because of comparative advantage?
Most trade occurs because of comparative advantage because both countries need to trade what they lack in order to make up for what they need . Countries trade to specialize in what takes them less worker hours to produce. Trade helps countries meet the economic goal of efficiency.
How can comparative advantage be improved?
It is being able to produce goods by using fewer resources, at a lower opportunity cost , that gives countries a comparative advantage. The gradient of a PPF reflects the opportunity cost of production. Increasing the production of one good means that less of another can be produced.
What are the disadvantages of comparative advantage?
Limitations of comparative advantage theory
Transport costs and tariffs and exchange rates may change the relative prices of goods and may distort comparative advantages. Imperfect competition may lead to prices being different to opportunity cost ratios.
What is an example of 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.
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 .
How do you calculate 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. With the same labor time, Canada can produce either 20 barrels of oil or 40 tons of lumber.
What are the causes of a comparative advantage?
- Factors of Production. A major factor that affects comparative advantage is the country’s quality and quantity of the factors of production. ...
- Exchange Rate. Movements in exchange rates affect the prices of imported and exported goods. ...
- Inflation. ...
- Trade Barriers.
What gives a country a comparative advantage?
In economic terms, a country has a comparative advantage when it can produce at a lower opportunity cost than that of trade partners . While a country cannot have a comparative advantage in all goods and services, it can have an absolute advantage in producing all goods.
What factors affect a country’s comparative advantage?
The existence of a comparative advantage is, in turn, affected by things such as abundance, productivity , cost of labor, land, and capital. Other factors also might influence a country’s comparative advantage in practical terms, such as a highly developed financial system or economies of scale.
Who has 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 are the assumptions of comparative advantage?
Assumptions of the Theory:
The Ricardian doctrine of comparative advantage is based on the following assumptions: (1) There are only two countries, say A and B. (2) They produce the same two commodities, X and Y (3) Tastes are similar in both countries. (4) Labour is the only factor of production.
What products the US has a comparative advantage?
The United States has a revealed comparative advantage in exporting capital goods, chemicals, miscellaneous goods, plastics, rubber and transportation .
Who has a comparative advantage in producing cars?
e. Japan has a comparative advantage in producing cars, since it has a lower opportunity cost in terms of grain given up. The United States has a comparative advantage in producing grain, since it has a lower opportunity cost in terms of cars given up.
What is an example of 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.
