Absolute Advantage, Comparative Advantage, and Opportunity Costs. Absolute Advantage: Comparative Advantage: Concept: It occurs when a country produces better goods and services better than its competitors using the same amount of resources. d. Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 3 of 6 (8) 6. Make opportunity cost comparisons by creating an “output” matrix first. People succeed in life by specializing at what they do best. Specialization according to absolute advantage and comparative advantage, and the resulting trade patterns. Trade The following quiz can be used to test understanding of the comparative advantage concept: With the cost of production of two goods in two different countries, it is possible to calculate how much the two countries could gain from trade. World economies depend on the outcome. In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. All countries only have a certain amount of resources available, so they always face trade-offs between the different goods. While in the time it takes Erica to make one cupcake, she could have made 3 donuts. 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. Comparative advantage in clarinets. And now what's always interesting about thinking about this is notice, country B has the comparative advantage in toy cars. b. The term “comparative advantage” is usually attributed to David Ricardo. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. Both Sally and Adam have the same opportunity costs for these two goods. to produce some particular good or service at a lower opportunity cost than other economic actors can. The theory of comparative advantage is attributed to political economist David Ricardo, who wrote the book Principles of …  What is the opportunity cost of producing a car in the U.S.? In this lesson, we learned the definitions of and differences between comparative and absolute advantage. Assess your understanding of absolute advantage and a similar term, comparative advantage, with this quiz and corresponding worksheet. The ability of one economic actor (an individual, a household, a firm, a country, etc.) As such, comparative advantage can be considered as an important concept in global trade, and that’s the reason for several countries to concentrate on trying to make or to produce certain services or goods more efficiently when compared to other countries. The law of comparative advantage applies to International Trade and was introduced by David Ricardo in the early 1800s.  Peru can produce 20 cars and 15 tools. Comparative advantage. This may negate the ability of a nation to exploit it: the realism can be challenged by considering factors such as imperfect factor mobility within an economy; protectionism; transport costs, non–homogenous products; imperfect information among producers and consumers. Indeed, if we ask who has the comparative advantage in cupcakes, we will find that it’s John. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. An important aspect that is omitted if we only look at absolute advantages is the presence of opportunity costs. For John to make one cupcake, he must give up 2 donuts. Comparative advantage in sleds. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Portugal could produce both wine and cloth with less labor than it would have taken to produce the same output in England. Differences Between Absolute and Comparative Advantage. More simply, this means that a country can produce a good at a lower cost than another country. Difference Between Absolute Advantage vs Comparative Advantage. Comparative Advantage Quiz . 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