Introduction to economics; Comparative advantage and the gains from trade

Question 1

What is a comparative advantage simple definition?

Answer 1

Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. Comparative advantage is used to explain why companies, countries, or individuals can benefit from trade.

Question 2

What is an example of specialization?

Answer 2

Specialization involves focusing on a specific skill, activity, or production process, such

Question 3

What is meant by absolute advantage?

Answer 3

Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than its competitors.

Question 4

What is a good example of comparative advantage?

Answer 4

For example, if a country is skilled at making both cheese and chocolate, they may determine how much labor goes into producing each good. If it takes one hour of labor to produce 10 units of cheese and one of of labor to produce 20 units of chocolate, then this country has a comparative advantage in making chocolate.

Question 5

What is the basis for comparative advantage?

Answer 5

Comparative advantage is usually measured in opportunity costs, or the value of the goods that could be produced with the same resources. This is then compared with the opportunity costs of another economic actor to produce the same goods.

Question 6

What is comparative advantage for dummies?

Answer 6

Comparative advantage is a key principle in international trade and forms the basis of why free trade is beneficial to countries. The theory of comparative advantage shows that even if a country enjoys an absolute advantage in the production of goods, trade can still be beneficial to both trading partners.

Question 7

What is an example of comparative advantage between two countries?

Answer 7

For example, countries with plentiful oil resources can generally produce oil inexpensively. Because Saudi Arabia produces oil very cheaply, it holds a comparative advantage in oil, and it exports oil in order to finance its purchases of imports.

Question 8

What do you mean by absolute advantage?

Answer 8

Absolute advantage is the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time, or to produce the same quantity of a good or service per unit of time using a lesser quantity of inputs, than its competitors.