comparative advantage is determined by which of the following

When there is free trade, why do some countries remain poor at the expense of others? Appeals to save American jobs and preserve a time-honored American craft abound, even though, in the long run, American laborers would be made relatively less productive and American consumers relatively poorer by such protectionist tactics. c. Absolute advantage in sleds. The offers that appear in this table are from partnerships from which Investopedia receives compensation. International trade - International trade - Sources of comparative advantage: As already noted, British classical economists simply accepted the fact that productivity differences exist between countries; they made no concerted attempt to explain which commodities a country would export or import. (One should not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Hypothetically, say that Michael Jordan could paint his house in eight hours. Investopedia uses cookies to provide you with a great user experience. Comparative Advantage vs. Absolute Advantage, Comparative Advantage vs. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. Following Ricardo’s theory of comparative advantage in free trade, if each country specializes in what they enjoy a comparative advantage in and imports the other good, they will be better off. In Ricardo’s theory, differences in the productivity of labour accounted for comparative advantage. Economics Mcqs. Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 3 of 6 (8) 6. The following example presents a hypothetical example of two countries: Japan and China both producing fish and cloth, and assuming labor is the only input. Chinese workers produce simple consumer goods at a much lower opportunity cost. This involves for example, providing non-viable firms with subsidies (e.g., through fiscal transfers) and protections. By contrast, Jordan's neighbor Joe could paint the house in 10 hours. More simply, this means that a … Comparative Advantage DRAFT. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. These resources come from the import competing comparative disadvantage sector. Comparative advantage is determined by differences in the labour hours requires to produce each good. By using Investopedia, you accept our. For Country A, for every 1 gun that they make they have to give up 2 lbs. (adsbygoogle = window.adsbygoogle || []).push({}); PakMcqs.com is the Pakistani Top Mcqs website, where you can find Mcqs of all Subjects, You can also Submit Mcqs of your recent test and Take online Mcqs Quiz test. What Factors Influence a Change in Demand Elasticity? 11th - 12th grade. 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. However, this is not a long-term solution to a trade problem. 1 Comparative and Absolute Advantage and the Production Possibilities Frontier1 Instructional Primer2 The Ricardian principles of Comparative and Absolute Advantage have shaped the discussion on trade for centuries, indeed they form the basis from which we understand why two nations engage in trade. Tags: Question 6 . Perhaps comparative advantage does not work as suggested. Output Per Hour Of Work Smartphones Fitness Bracelets 9 12 6 5 Switzerland Canada Which Of The Following Statements Is True? As an example, consider a famous athlete like Michael Jordan. The goal of this paper is to assess the empirical performance of Ricardo™s ideas. Your email address will not be published. Suppose that Australia and Brazil have the outputs per worker in producing sleds and clarinets shown in the table at the right. ... Country A has the comparative advantage in shirts & Country B has the comparative advantage in chairs. Comparative Advantage DRAFT. The key to understanding comparative advantage is a solid grasp of opportunity cost. A nation with a comparative advantage makes the trade-off worth it. The theory of comparative advantage helps to explain why protectionism is typically unsuccessful. Differences Between Absolute and Comparative Advantage. here you will find the the Baisc to Advance and most Important Economics Mcqs for your test preparation. for two goods 1 and 2, then –eld 2 has a comparative advantage in good 2.2 1In line with Ricardo™s theory of comparative advantage, the focus of our paper is on the supply-side of the economy, not the demand-side considerations that would ultimately pin down prices around the world. Comparative advantage is determined by differences in the labour hours requires to produce each good. International trade - International trade - Sources of comparative advantage: As already noted, British classical economists simply accepted the fact that productivity differences exist between countries; they made no concerted attempt to explain which commodities a country would export or import. comparative advantage) of free trade? Required fields are marked *. Factors of Production. 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. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit. Absolute Advantage is the ability with which an increased number of goods and services can be produced and that too at a better quality as compared to competitors whereas Comparative Advantage signifies the ability to manufacture goods or services at a relatively lower opportunity cost.. Opportunity cost measures a trade-off. 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. Another way to think of comparative advantage is as the best option given a trade-off. Use the following information to determine Brunei’s gains from trade. To see the difference, consider an attorney and their secretary. O A. 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. In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. Use the law of comparative advantage to determine what goods countries will specialize in. Competitive advantage refers to a company, economy, country, or individual's ability to provide a stronger value to consumers as compared with its competitors. Put simply, an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another. 1. B. So long as Michael Jordan makes the expected $50,000 and Joe earns more than $100, the trade is a winner. Comparative Advantage and the Gains from Trade Part 1: Multiple Choice Select the best answer of those given. People learn their comparative advantages through wages. Absolute advantage refers to the uncontested superiority of a country to produce a particular good better. Understanding Microeconomics vs. Macroeconomics, Differentiate Between Micro and Macro Economics, Microeconomics vs. Macroeconomics Investments. Is Demand or Supply More Important to the Economy? The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage. The benefits of buying its good or service outweigh the disadvantages. Why doesn't the world have open trading between countries? 2. In particular, the factor of production capital is not a natural resource, and so may come outside the scope of the theory. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. comparative advantage) of free trade? And for every pound … Which of the following is true? We show this by comparing location specific distributions of the Balassa-Index (BI). Question: Using The Numbers In The Table, Determine Which Country Has A Comparative Advantage In Producing Each Product. In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. 38. Competitive Advantage, Comparative Advantage in International Trade, Government Imposed Quota Can Limit Imports and Exports, What the Production Possibility Frontier (PPF) Curve Shows, Competitive Advantage: What Gives Companies an Edge, Economists' Assumptions in their Economic Models, Understanding Positive vs. Normative Economics. A. actual differences in labor productivity between countries In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. Explain when a country has a comparative advantage over another country. c. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade. Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages. a. Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources. Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. Your email address will not be published. Explain how market forces lead … Michael Jordan would likely be able to, say, paint his house quickly, owing to his abilities as well as his impressive height. Comparative advantage theory is a static theory and does not take account of some of the more dynamic elements determining world trade. Comparative advantage is determined by autarky prices. The following example of Comparative Advantage provides an overview of the most popular comparative advantages. If you're comparing two different options, each of which has a trade-off (some benefits as well as some disadvantages), the one with the best overall package is the one with the comparative advantage. b. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. The best trade would be for Michael Jordan to film a television commercial and pay Joe to paint his house. ... What matters is comparative advantage. To produce $25 in income from secretarial work, the attorney must lose $175 in income by not practicing law. b. A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor. b) absolute costs of production in each country after accounting for inflation. The purpose of this paper is to demonstrate the validity of a weak form of the law of comparative advantage, that is, that the pattern of international trade is determined by comparative advantage. What Is the Concept of Utility in Microeconomics? Argued that productivity differences account for comparative advantage and opportunity cost Demand or Supply more Important to the?. Costs are higher in one country than in another the offers that appear in case. Comparative advantage™ comparative advantage is determined by which of the following see Paul Samuelson ( 1995, p. 22 ) way to THINK of comparative advantage an. 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