Question: The concept of comparative advantage is based upon: a) absolute labor productivity. Adeyinka (1994) gives the following definitions for the concept. In those same eight hours, though, he could also take part in the filming of a television commercial which would earn him $50,000. The theory of comparative advantage is perhaps the most important concept in international trade theory. - dollar prices of labor. comparative advantage can be expected to exist within a heterogeneous sport as athletics. What Does the Law of Diminishing Marginal Utility Explain? American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Satisfaction guaranteed! C) relative opportunity costs. d. relative opportunity costs. Comparative Advantage Is Based On The Economic Concept Of: A. relative labor costs. It has continued to command attention mainly because of its use as the basic “scientific” argument of free trade economists in their attack on protective tariffs. 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. than another country. Rent seeking occurs when one group organizes and lobbies the government to protect its interests. Ricardo predicted that each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate. Absolute advantage refers to the uncontested superiority of a country to produce a particular good better. Hypothetically, say that Michael Jordan could paint his house in eight hours. In a single day, Sarah can produce 10 hamburgers while Abe can produce 5 hamburgers. By using Investopedia, you accept our. What is a Comparative Advantage? D) relative opportunity costs. Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages. The secretary is much better off typing and organizing for the attorney; their opportunity cost of doing so is low. Country A has an absolute advantage in cars. 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. The concept of comparative advantage is based upon: a. absolute labor productivity. Expert Answer . Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit. If you do everything better than anyone else, should you be self-sufficient and do everything yourself? Course Hero is not sponsored or endorsed by any college or university. The concept of comparative advantage is based upon: (Points: 3) absolute labor productivity. . (One should not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. 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. 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. The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book “On the Principles of Political Economy and Taxation” written in 1817, although it is likely that Ricardo's mentor, James Mill, originated the analysis. Their opportunity cost of secretarial work is high. Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. D) People learn their comparative advantages through wages. The country may not be the best at producing something. Share your own to gain free Course Hero access. In other words, there are as many definitions as there are many Educational omparativists. It is similar to, but distinct from, comparative advantage. Course Hero has all the homework and study help you need to succeed! The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage. c. an absolute advantage in producing both coffee and salmon. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. The literature reports numerous alternative indices that purport to "measure" comparative advantage. The concept of comparative advantage is based upon: A) dollar prices of labor. Comparative advantage, economic theory, first developed by 19th-century British economist David Ricardo, that attributed the cause and benefits of international trade to the differences in the relative opportunity costs (costs in terms of other goods given up) of producing the same commodities among countries. For clarity of exposition, the theory of comparative advantage is usually first outlined as though only two countries and only two commodities were involved, although the principles are by no means limited to such cases. It is also a foundational principle in the theory of international trade. The concept of comparative advantage is based upon: A) absolute labor productivity. Country A has an absolute advantage in computers. Find the best study resources around, tagged to your specific courses. How Does Government Policy Impact Microeconomics? c. dollar prices of labor. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. 1-why do nations trade based on the concept of comparative advantage? These type of differences in specialisation are the focus of the present article. The production possibility frontier (PPF) is a curve that is used to discover the mix of products that will use available resources most efficiently. Perhaps comparative advantage does not work as suggested. Ask your own questions or browse existing Q&A threads. Based on this information, which of the following statements is TRUE? In this case, the attorney has an absolute advantage in both the production of legal services and secretarial work. The key to understanding comparative advantage is a solid grasp of opportunity cost. c. dollar - Answered by a verified Tutor Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. A nation with a comparative advantage makes the trade-off worth it. We then know that: A) Sarah has a comparative advantage in making hamburgers. The United States’ comparative advantage is in specialized, capital-intensive labor. In that same period of time, he could work at a fast food restaurant and earn $100. BFM's use of the word "index" leads them to believe that the NCA 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. His theory concluded that a country could increase its income by specializing in certain products and services and selling these on the international market. Eventually, that country will be at a disadvantage relative to its neighbors: countries that were already better able to produce these items at a lower opportunity cost. As an example, consider a famous athlete like Michael Jordan. Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. Opportunity cost measures a trade-off. What Is the Utility Function and How Is it Calculated? As a renowned basketball and baseball star, Michael Jordan is an exceptional athlete whose physical abilities surpass those of most other individuals. - relative opportunity costs. Competitive advantage refers to a company, economy, country, or individual's ability to provide a stronger value to consumers as compared with its competitors. In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost Opportunity Cost Opportunity cost is one of the key concepts in the study of economics and is prevalent throughout various decision-making processes. DATA AND METHODOLOGY The concept of comparative advantage is central to international trade theory but this concept is based upon autarkic prices which are not observable in post-trade equilibrium. (a) A study of two or more education systems. Say, for example, the producers of American shoes understand and agree with the free-trade argument but they also know that their narrow interests would be negatively impacted by cheaper foreign shoes. For countries, the following factors are important in order to determine the relative unit costs of production: 1. The concept of the comparative advantage is based upon the fact of the relative opportunity costs, A country is said to have a... e advantage if it can manufacture the goods are at a lower relative opportunity cost than the other country. Understanding Microeconomics vs. Macroeconomics, Differentiate Between Micro and Macro Economics, Microeconomics vs. Macroeconomics Investments. (iii) There are static conditions in the economy. Thus, the NCA concept is not used to define comparative advantage, it only permits an interpretation of the scale variable that is implied by the assumption of identical and homothetic preferences. B) ab solute labor productivity. Businesses also may have a comparative advantage over their competitors … Comparative Advantage vs. Absolute Advantage, Comparative Advantage vs. In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. By contrast, Jordan's neighbor Joe could paint the house in 10 hours. The Ricardian comparative costs analysis is based upon the following assumptions: (i) There is no intervention by the government in economic system. What Factors Influence Competition in Microeconomics? The concept of comparative advantage is based upon: A) dollar prices of labor. In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. International trade in consideration of the two theories will result to expansion of export production sector and at the same time contraction will be taking place on the import sector. across countries is a central concept in international trade theory. 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. C) relative opportunity costs. To produce $25 in income from secretarial work, the attorney must lose $175 in income by not practicing law. Absolute advantage refers to the ability to produce more or better goods and services than somebody else. A comparative advantage … In spite of there are many criticisms for comparative advantage theory, but some people supported comparative advantage theory and they have talked about the advantages its, such as Adam Smith and David … The offers that appear in this table are from partnerships from which Investopedia receives compensation. relative … David Ricardo famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages. Comparative advantage is one of the most important concepts in economic theory and a fundamental tenet of the argument that all actors, at all times, can mutually benefit from cooperation and voluntary trade. We’ve got course-specific notes, study guides, and practice tests along with expert tutors. 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. This paper examines the extent to which various By instead concentrating on the things you do the “most best” and exchanging or trading any excess of those things with someone else for the things that person does the “most best,” you can both be better off. There are many reasons this could be the case, but the most influential is something that economists call rent seeking. Comparative advantage is contrasted with absolute advantage. comparative advantage is based upon the concept of constant returns: the idea that you can double or triple the output of any good simply by doubling or tripling the inputs. Put simply, an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another. Static comparative advantage. The concept of comparative advantage was first formulated by economist David Ricardo as an explanation of the benefits of international trade for countries. The doctrine of comparative advantage originated as an improvement and development of the 18th century criticism of mercantilist policy. Question: ( 1.) b) relative labor costs. Why doesn't the world have open trading between countries? dollar prices of labor. 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. With increasing returns, the lowest … Specializing and trading along these lines benefit each. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception; the cost of production falls with experience. When a company or someone can produce at a cheaper cost than anyone else that is a comparative advantage theory. If a skilled mathematician earns more money as an engineer than as a teacher, they and everyone they trade with are better off when they practice engineering. . However, this is not a long-term solution to a trade problem. This means that it can and does change over time. B) relative labor costs. The quantity and quality of factors of production that are available. Get one-on-one homework help from our expert tutors—available online 24/7. What Is the Concept of Utility in Microeconomics? What Factors Influence a Change in Demand Elasticity? Since the concept is based upon autarkic prices which are not observable in post-trade equilibria, its use in empirical research is most difficult. Suppose the attorney produces $175 per hour in legal services and $25 per hour in secretarial duties. Previous question Next question Get more help from Chegg. The opportunity cost is the value of the next best alternative foregone. A developing economy, in sub-Saharan-Africa, may have a comparative advantage in producing primary products (metals, agriculture), but these products have a low-income elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. 29. Another way to think of comparative advantage is as the best option given a trade-off. 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. When there is free trade, why do some countries remain poor at the expense of others? Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. - relative labor costs. B. Is Demand or Supply More Important to the Economy? The benefits of buying its good or service outweigh the disadvantages. Understanding Elasticity vs. Inelasticity of Demand, Factors Determining the Demand Elasticity of a Good. 13. C) dollar prices of labor. 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. C. Nonsatiety D. Rationality. Answer to 26. B) ab solute labor productivity. Trade is based upon some sort of advantage, it is based on some sort of differential advantage (Beaudreau, 2011). Indeed, as time went on, England stopped producing wine, and Portugal stopped manufacturing cloth. 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. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Adherents to this analytical approach believe that countries engaged in international trade will have already worked toward finding partners with comparative advantages. Michael Jordan would likely be able to, say, paint his house quickly, owing to his abilities as well as his impressive height. But this is not generally the case. The greater the diversity in people and their skills, the greater the opportunity for beneficial trade through comparative advantage. This drives people into those jobs that they are comparatively best at. A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor. The context that is favourable to ‘produce’ long distance runners is likely to be different from the context favouring success in pole vaulting. He argues that ". It’s where their comparative advantage lies. The concept of comparative advantage is based upon: - absolute labor productivity. b. absolute labor productivity. Like other concepts, comparative education is a concept that attracts varied interpretations or definitions. It is also one of the most commonly misunderstood principles. Akbar Can Write 5 Pages Or Bake 1 Pie In An Hour. The concept of comparative advantage is based upon. b. a comparative advantage in producing salmon only. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. Marginal Cost. The concept of comparative advantage is based upon: a. absolute labor productivity.. relative labor costs. 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