What do you mean by comparative advantage?

Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. Comparative advantage is a key insight that trade will still occur even if one country has an absolute advantage in all products.

What is David Ricardo theory of comparative advantage?

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.

What is meant by absolute advantage?

absolute advantage, economic concept that is used to refer to a party’s superior production capability. Specifically, it refers to the ability to produce a certain good or service at lower cost (i.e., more efficiently) than another party.

What is the formula for 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.

Who has the 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 four factor endowments?

Factor endowments are the land, labor, capital, and resources that a country has access to, which will give it an economic comparative advantage over other countries.

Which theory is called iron law of wages?

The iron law of wages is a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle in the mid-nineteenth century.

What is the difference between mercantilism and absolute advantage?

Mercantilism was called as a zero-sum game as only one country benefitted from it. Theory of Absolute Advantage: Given by Adam Smith in 1776, the theory of absolute advantage stated that a country should specialize in those products, which it can produce efficiently.

What is a country’s balance of trade?

balance of trade, the difference in value over a period of time between a country’s imports and exports of goods and services, usually expressed in the unit of currency of a particular country or economic union (e.g., dollars for the United States, pounds sterling for the United Kingdom, or euros for the European Union …

What is the best definition of comparative advantage?

Definition of comparative advantage Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries

What makes a nation with a comparative advantage worth the tradeoff?

A nation with a comparative advantage makes the trade-off worth it. The benefits of buying its good or service outweigh the disadvantages. The country may not be the best at producing something. But the good or service has a low opportunity cost for other countries to import.

Why does the UK have a comparative advantage in book production?

The UK has a comparative advantage in producing books. This is because it has a lower opportunity cost of 0.25 (1/4) compared to India’s 0.66 (2/3) If each country now specializes in one good then, assuming constant returns to scale, output will double.

Which country has a comparative advantage in clothes?

The United States enjoys a comparative advantage in cloth. In France, the country specializes in wine and produces 1,000 barrels. Recall that the opportunity cost of 1 barrel of wine in the United States is 1 piece of cloth.