5.4: Comparative Advantage Flashcards
What is the fundamental idea behind David Ricardo’s theory of comparative advantage?
Ricardo’s theory of comparative advantage suggests that a country should specialize in producing goods it can produce most efficiently, even if it has an absolute advantage in the production of all goods.
The country should trade with other nations for goods it produces less efficiently.
In Ricardo’s theory of comparative advantage, what does a country specialize in, and how does this contribute to global trade patterns?
A country specializes in producing goods where it has a comparative advantage, leading to efficient global trade patterns.
Specialization allows countries to maximize their production efficiency and trade for goods they produce less efficiently, promoting economic growth and welfare.
What is the core concept of the comparative advantage theory?
Comparative advantage theory suggests that a country should specialize in producing goods it can make most efficiently and trade with other nations for goods they produce more efficiently.
How does comparative advantage differ from absolute advantage?
Comparative advantage focuses on producing goods where a country has a lower opportunity cost, while absolute advantage emphasizes being the most efficient producer of a good.
Why does a country benefit from specializing in goods it has a comparative advantage in?
Specializing in goods of comparative advantage allows a country to maximize its production efficiency, leading to increased overall output and wealth.
Does a country need to have an absolute advantage in any product to benefit from trade according to the comparative advantage theory?
No, a country does not need an absolute advantage in any product to benefit from trade. It only needs a comparative advantage, which is based on relative efficiency, not absolute efficiency.
How does engaging in international trade based on comparative advantage impact overall production and consumption?
Engaging in trade based on comparative advantage increases overall production and consumption as countries specialize in what they are best at, leading to more efficient resource utilization and higher living standards for citizens.
Why might a country import a good it can produce domestically?
A country might import a good it can produce because it can use its resources more efficiently by focusing on products where it has a comparative advantage, even if it can produce the imported good domestically.
Figure 5.2: The Theory of Comparitaive Advantage
