In order to determine if comparative advantages exist between the two countries, you have to figure out the opportunity cost of making one unit of one of the items. Understanding Microeconomics vs. Macroeconomics, Differentiate Between Micro and Macro Economics, Microeconomics vs. Macroeconomics Investments. In the case of comparative advantage, the opportunity cost (that is to say, the potential benefit which has been forfeited) for one company is lower than that of another. Which of the following is true? Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources. Question: Determining Absolute And Comparative Advantage There Are Two Ways To Approach Comparative Advantage And Opportunity Cost. Balance of Payments, Aid and Foreign Investment, Characteristics and Institutions of Developing Countries, Exchange-Rate Systems And Currency Crises. Comparative advantage is determined by comparing the opportunity cost of each good in different countries. comparative advantage) of free trade? Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. Following Ricardo, economists have argued that productivity differences account for comparative advantage. A quota or protectionism is a government-imposed trade restriction limiting the number or value of goods a nation imports or exports during a specific time. Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 3 of 6 (8) 6. Absolute advantage refers to the uncontested superiority of a country to produce a particular good better. 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. A comparative advantage is determined by the following points: • The factors of production, specifically the quality and quantity • Whether the government intervenes • Competition based on things other than monetary value • Real exchange rate fluctuations An absolute advantage is when a country is the best producer of a specific product or service, or is able to produce more output than other nations from a … Absolute advantage and comparative advantage are two important concepts in economics and … A country can also create competitive advantage, a practice that's called national competitive advantage or comparative advantage. Comparative advantage theory is a static theory and does not take account of some of the more dynamic elements determining world trade. Required fields are marked *. People learn their comparative advantages through wages. b. A. actual differences in labor productivity between countries B. relative differences in labor productivity between countries C. Both (a) and (b) D. Neither (a) nor (b) Mcq Added by: Adden wafa. Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. 11th - 12th grade. Use the law of comparative advantage to determine what goods countries will specialize in. Differences Between Absolute and Comparative Advantage. The following example of Comparative Advantage provides an overview of the most popular comparative advantages. The prices of goods and services are usually determined by the government. Assume that Sri Lanka completely specializes in production of its comparative advantage good, and trades 22,000 units of it to Brunei for 100,000 units of Brunei’s comparative advantage good. BIBLIOGRAPHY. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. here you will find the the Baisc to Advance and most Important Economics Mcqs for your test preparation. Countries that implement the CAD strategy promote the development of advanced capital-intensive (heavy) industries that are not consistent with their comparative advantage, which is determined by their factor endowments. Specializing and trading along these lines benefit each. In order to assume a competitive advantage over others in the same field or area, it's necessary to accomplish at least one of three things: the company should be the low-cost provider of its goods or services, it should offer superior goods or services than its competitors, and/or it should focus on a particular segment of the consumer pool. It is similar to, but distinct from, comparative advantage. We show this by comparing location specific distributions of the Balassa-Index (BI). It is also a foundational principle in the theory of international trade. This desire leads the shoemakers to lobby for, say, special tax breaks for their products and/or extra duties (or even outright bans) on foreign footwear. Perhaps comparative advantage does not work as suggested. Differences Between Absolute and Comparative Advantage. Hypothetically, say that Michael Jordan could paint his house in eight hours. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Which of the following is true? Absolute advantage is the ability of an entity to produce a greater quantity of the same good or service with the same constraints than another entity. Comparative advantage is a term associated with 19th Century English economist David Ricardo. For example, the natural availability of mineral resources like iron, gold, and copper is not something a country can change. Tags: Question 6 . Both countries saw that it was to their advantage to stop their efforts at producing these items at home and, instead, to trade with each other in order to acquire them. Between two countries, comparative advantage is found by comparing the: a) relative costs of production in each country. Comparative advantage is contrasted with absolute advantage. If a country removes itself from an international trade agreement, if a government imposes tariffs, and so on, it may produce a local benefit in the form of new jobs and industry. 1. As a renowned basketball and baseball star, Michael Jordan is an exceptional athlete whose physical abilities surpass those of most other individuals. Even if laborers would be most productive by switching from making shoes to making computers, nobody in the shoe industry wants to lose their job or see profits decrease in the short run. One Approach, The Output-per-fixed-input Approach, Appears On The Trade Infographic Of Week 6. SURVEY . Why doesn't the world have open trading between countries? Use the following information to determine Brunei’s gains from trade. Recall that: France enjoys a comparative advantage in wine. Comparative advantage is a situation in which a country may produce goods at a lower opportunity cost than another country, but not necessarily have an absolute advantage in producing that good. Comparative advantage is closely associated with free trade, which is seen as beneficial, whereas tariffs closely correspond to restricted trade and a zero-sum game. C. Both (a) and (b) a. c. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade. b. The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Your email address will not be published. Comparative Advantage and the Gains from Trade Part 1: Multiple Choice Select the best answer of those given. 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