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. The concept of comparative advantage is based upon: A) dollar prices of labor. B) ab solute labor productivity. Simplified theory of comparative advantage. Is Demand or Supply More Important to the Economy? 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. c. dollar prices of labor. 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. Like other concepts, comparative education is a concept that attracts varied interpretations or definitions. BFM's use of the word "index" leads them to believe that the NCA Expert Answer . For countries, the following factors are important in order to determine the relative unit costs of production: 1. Akbar Can Write 5 Pages Or Bake 1 Pie In An Hour. Country A has an absolute advantage in cars. The attorney is better at producing legal services than the secretary and is also a faster typist and organizer. How Does Government Policy Impact Microeconomics? 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. Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. (ii) Perfect competition exists both in the commodity and factor markets. The United States’ comparative advantage is in specialized, capital-intensive labor. Absolute advantage refers to the ability to produce more or better goods and services than somebody else. B. Chinese workers produce simple consumer goods at a much lower opportunity cost. Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. 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. The context that is favourable to ‘produce’ long distance runners is likely to be different from the context favouring success in pole vaulting. subject and in accordance with the logics of resource-based view. 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) ab solute labor productivity. Another way to think of comparative advantage is as the best option given a trade-off. The concept of comparative advantage is based upon: (Points: 3) absolute labor productivity. A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor. 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. Suppose the attorney produces $175 per hour in legal services and $25 per hour in secretarial duties. The concept of comparative advantage is based upon: a. absolute labor productivity. 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. b. absolute labor productivity. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. 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. c. dollar - Answered by a verified Tutor 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 … c. an absolute advantage in producing both coffee and salmon. In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. Ask your own questions or browse existing Q&A threads. In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages. Course Hero has all the homework and study help you need to succeed! Absolute advantage refers to the uncontested superiority of a country to produce a particular good better. Specializing and trading along these lines benefit each. 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. The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage. The theory of comparative advantage is perhaps the most important concept in international trade theory. This drives people into those jobs that they are comparatively best at. The doctrine of comparative advantage originated as an improvement and development of the 18th century criticism of mercantilist policy. Trade is based upon some sort of advantage, it is based on some sort of differential advantage (Beaudreau, 2011). Static comparative advantage. Marginal Cost. Indeed, as time went on, England stopped producing wine, and Portugal stopped manufacturing cloth. 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. Opportunity cost measures a trade-off. Based on this information, which of the following statements is TRUE? The concept of comparative advantage is based upon. (a) A study of two or more education systems. 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. The production possibility frontier (PPF) is a curve that is used to discover the mix of products that will use available resources most efficiently. (One should not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. - relative opportunity costs. Comparative advantage is a key insight that trade will still occur even if one country has an absolute advantage in all products. The theory of comparative advantage helps to explain why protectionism is typically unsuccessful. Their opportunity cost of secretarial work is high. The concept of comparative advantage is based on: Select one: a. relative labor costs. The concept of comparative advantage is based upon: - absolute labor productivity. What Does the Law of Diminishing Marginal Utility Explain? The secretary can produce $0 in legal services and $20 in secretarial duties in an hour. The concept of comparative advantage is based upon: A) absolute labor productivity. We’ve got course-specific notes, study guides, and practice tests along with expert tutors. 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. In that same period of time, he could work at a fast food restaurant and earn $100. They are better off by producing an hour's worth of legal services and hiring the secretary to type and organize. To produce $25 in income from secretarial work, the attorney must lose $175 in income by not practicing law. B) relative labor costs. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. C) relative opportunity costs. The benefits of buying its good or service outweigh the disadvantages. than another country. 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. The opportunity cost is the value of the next best alternative foregone. Comparative advantage is contrasted with absolute advantage. With increasing returns, the lowest … When there is free trade, why do some countries remain poor at the expense of others? ( 2.) d. a comparative advantage in producing neither coffee nor salmon e. an absolute advantage in producing neither coffee nor salmon ____ 15. Share your own to gain free Course Hero access. But the good or service has a low opportunity cost for … The concept of comparative advantage is based upon: a. absolute labor productivity.. relative labor costs. A comparative advantage … 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. For manufactured products, increasing returns, learning, and technical change are the rule, not the exception; the cost of production falls with experience. Course Hero is not sponsored or endorsed by any college or university. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. Self-sufficiency is one possibility, but it turns out you can do better and make others better off in the process. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit. Investopedia uses cookies to provide you with a great user experience. This paper examines the extent to which various Opportunity Cost. 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. The best trade would be for Michael Jordan to film a television commercial and pay Joe to paint his house. c) dollar prices of labor. He argues that ". We then know that: A) Sarah has a comparative advantage in making hamburgers. It’s where their comparative advantage lies. As a renowned basketball and baseball star, Michael Jordan is an exceptional athlete whose physical abilities surpass those of most other individuals. 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. . The literature reports numerous alternative indices that purport to "measure" comparative advantage. The quantity and quality of factors of production that are available. Question: The concept of comparative advantage is based upon: a) absolute labor productivity. But this is not generally the case. 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. Previous question Next question Get more help from Chegg. C. Nonsatiety D. Rationality. 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. Rent seeking occurs when one group organizes and lobbies the government to protect its interests. Find the best study resources around, tagged to your specific courses. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. across countries is a central concept in international trade theory. By using Investopedia, you accept our. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. A nation with a comparative advantage makes the trade-off worth it. Comparative Advantage Is Based On The Economic Concept Of: A. 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. Is the concept of comparative advantage is based upon: trade, why do some countries remain poor at the expense others... The literature reports numerous alternative indices that purport to `` measure '' comparative advantage is based:... Gaps in opportunity costs Sarah has a comparative advantage originated as an and! 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