Differences Between Absolute and Comparative Advantage. In that same period of time, he could work at a fast food restaurant and earn $100. Required fields are marked *. A nation with a comparative advantage makes the trade-off worth it. ... Country A has the comparative advantage in shirts & Country B has the comparative advantage in chairs. These goods are homogeneous, meaning that consumers and producers cannot differentiate between shoes from Mexico and shoes from the U.S.; nor can they differentiate between Mexican or American refrigerators.From Table 1, we can see that it takes four U.S. workers to produce 1,000 pairs of shoes, but it takes five Mexican workers to do so. Output Per Hour Of Work Smartphones Fitness Bracelets 9 12 6 5 Switzerland Canada Which Of The Following Statements Is True? Say, for example, the producers of American shoes understand and agree with the free-trade argument but they also know that their narrow interests would be negatively impacted by cheaper foreign shoes. Then Brazil has a a. International trade - International trade - Sources of comparative advantage: As already noted, British classical economists simply accepted the fact that productivity differences exist between countries; they made no concerted attempt to explain which commodities a country would export or import. In this case, the attorney has an absolute advantage in both the production of legal services and secretarial work. This drives people into those jobs that they are comparatively best at. here you will find the the Baisc to Advance and most Important Economics Mcqs for your test preparation. It’s where their comparative advantage lies. is perhaps the most important concept in international trade theory. 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. 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. Which of the following is true? In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. Comparative advantage is a situation in which a country may produce goods at a lower opportunity cost than another country, but not necessarily have an absolute advantage in producing that good. Hypothetically, say that Michael Jordan could paint his house in eight hours. 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. Consider the example of trade in two goods, shoes and refrigerators, between the United States and Mexico. In Ricardo’s theory, differences in the productivity of labour accounted for comparative advantage. Following Ricardo’s theory of comparative advantage in free trade, if each country specializes in what they enjoy a comparative advantage in and imports the other good, they will be better off. A major factor that affects comparative advantage is the country’s quality and quantity of the factors of production. Absolute Advantage is the ability with which an increased number of goods and services can be produced and that too at a better quality as compared to competitors whereas Comparative Advantage signifies the ability to manufacture goods or services at a relatively lower opportunity cost.. The theory of comparative advantage A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivities between goods compared with another country are the highest. Absolute Advantage is the ability with which an increased number of goods and services can be produced and that too at a better quality as compared to competitors whereas Comparative Advantage signifies the ability to manufacture goods or services at a relatively lower opportunity cost.. What Factors Influence Competition in Microeconomics? Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Economics Mcqs for Lecturer & Subject Specialist Exams. In order to assume a competitive advantage over others in the same field or area, it's necessary to accomplish at least one of three things: the company should be the low-cost provider of its goods or services, it should offer superior goods or services than its competitors, and/or it should focus on a particular segment of the consumer pool. They are better off by producing an hour's worth of legal services and hiring the secretary to type and organize. 11th - 12th grade. The company with the lower opportunity cost, and thus the smallest potential benefit which was lost, holds this type of advantage. Balance of Payments, Aid and Foreign Investment, Characteristics and Institutions of Developing Countries, Exchange-Rate Systems And Currency Crises. By using Investopedia, you accept our. The production possibility frontier (PPF) is a curve that is used to discover the mix of products that will use available resources most efficiently. Adherents to this analytical approach believe that countries engaged in international trade will have already worked toward finding partners with comparative advantages. For Country A, for every 1 gun that they make they have to give up 2 lbs. c. Economists use the principle of comparative advantage to emphasize the potential benefits of free trade. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit. What Is the Concept of Utility in Microeconomics? What Does the Law of Diminishing Marginal Utility Explain? Which of the following is true? Truth, however, in Samuelson™s reply refers to the fact that Ricardo™s theory of comparative advantage is mathematically correct, not that it is empirically valid. Suppose the attorney produces $175 per hour in legal services and $25 per hour in secretarial duties. 9 times. More simply, this means that a … Which of the following statements is a fair comparison of the Heckscher-Ohlin theory and the Ricardo theory (i.e. a. We show this by comparing location specific distributions of the Balassa-Index (BI). American workers produce sophisticated goods or investment opportunities at lower opportunity costs. IF YOU THINK THAT ABOVE POSTED MCQ IS WRONG. Chinese workers produce simple consumer goods at a much lower opportunity cost. For example, the natural availability of mineral resources like iron, gold, and copper is not something a country can change. Their opportunity cost of secretarial work is high. Comparative Advantage Definition. One Approach, The Output-per-fixed-input Approach, Appears On The Trade Infographic Of Week 6. The best trade would be for Michael Jordan to film a television commercial and pay Joe to paint his house. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. Opportunity cost measures a trade-off. Another way to think of comparative advantage is as the best option given a trade-off. O A. D. Neither (a) nor (b). Put simply, an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another. This desire leads the shoemakers to lobby for, say, special tax breaks for their products and/or extra duties (or even outright bans) on foreign footwear. 3. Competitive advantage refers to a company, economy, country, or individual's ability to provide a stronger value to consumers as compared with its competitors. Third, the differences across locations of comparative advantage patterns is determined by the interaction of local skill-abundance and sector skill-intensity, in line with the predictions of the factor abundance model. Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources. Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. The United States enjoys a comparative advantage … Use the law of comparative advantage to determine what goods countries will specialize in. So long as Michael Jordan makes the expected $50,000 and Joe earns more than $100, the trade is a winner. Comparative advantage is contrasted with absolute advantage. Tags: Question 6 . The prices of goods and services are usually determined by the government. It is similar to, but distinct from, comparative advantage. b. For example, China uses cost leadership by exporting low-cost products at a reasonable quality level. of butter. The following example of Comparative Advantage provides an overview of the most popular comparative advantages. 1. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins. C. Both (a) and (b) 1 Comparative and Absolute Advantage and the Production Possibilities Frontier1 Instructional Primer2 The Ricardian principles of Comparative and Absolute Advantage have shaped the discussion on trade for centuries, indeed they form the basis from which we understand why two nations engage in trade. A comparative advantage is determined by the following points: • The factors of production, specifically the quality and quantity • Whether the government intervenes • Competition based on things other than monetary value • Real exchange rate fluctuations An absolute advantage is when a country is the best producer of a specific product or service, or is able to produce more output than other nations from a … Investopedia uses cookies to provide you with a great user experience. A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor. Economics Mcqs. To see the difference, consider an attorney and their secretary. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Absolute vs. A country can also create competitive advantage, a practice that's called national competitive advantage or comparative advantage. International trade - International trade - Sources of comparative advantage: As already noted, British classical economists simply accepted the fact that productivity differences exist between countries; they made no concerted attempt to explain which commodities a country would export or import. The secretary can produce $0 in legal services and $20 in secretarial duties in an hour. The trading principle formulated by Adam Smith maintained that: A) International prices are determined from the demand side of the market B) Differences in resource endowments determine comparative advantage C) Differences in income levels govern world trade patterns D) Absolute cost differences determine the immediate basis for trade The Opportunity Cost For Switzerland To Produce One Smartphone Is 0.75 Fitness Bracelet, B. Question: Determining Absolute And Comparative Advantage There Are Two Ways To Approach Comparative Advantage And Opportunity Cost. comparative advantage) of free trade? 4. How Countries Use Competitive Advantage . Perhaps comparative advantage does not work as suggested. In Ricardo’s theory, differences in the productivity of labour accounted for comparative advantage. B. relative differences in labor productivity between countries 2. In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. d. 1. (adsbygoogle = window.adsbygoogle || []).push({}); PakMcqs.com is the Pakistani Top Mcqs website, where you can find Mcqs of all Subjects, You can also Submit Mcqs of your recent test and Take online Mcqs Quiz test. As an example, consider a famous athlete like Michael Jordan. c. Absolute advantage in sleds. the following production points, decide whether that ... about how trade is determined by comparative advantage, answer the following questions. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. B. The prices of goods and services are usually determined by the government. A basic economic concept that involves multiple parties participating in the voluntary negotiation. b) absolute costs of production in each country after accounting for inflation. During the seventeenth and eighteenth centuries the dominant economic philosophy was mercantilism, which advocated severe restrictions on import and aggressive efforts to increase export.The resulting export surplus was supposed to enrich the nation through the inflow of precious metals. Nevertheless, they benefit from trade thanks to their comparative advantages and disadvantages. 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. Explain when a country has a comparative advantage over another country. Question: Using The Numbers In The Table, Determine Which Country Has A Comparative Advantage In Producing Each Product. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 3 of 6 (8) 6. PLEASE COMMENT BELOW WITH CORRECT ANSWER AND ITS DETAIL EXPLANATION. Use the following information to determine Brunei’s gains from trade. Costs are higher in one country than in another. There are many reasons this could be the case, but the most influential is something that economists call rent seeking. The attorney is better at producing legal services than the secretary and is also a faster typist and organizer. Recall that: France enjoys a comparative advantage in wine. Understanding Elasticity vs. Inelasticity of Demand, Factors Determining the Demand Elasticity of a Good. The country may not be the best at producing something. Comparative advantage is determined by autarky prices. Explain how two countries determine their terms of trade. Answer: A 4) The HO theorem states that a country will have comparative advantage in the good whose production is relatively intensive in the _____ with which the country is relatively abundant. Ricardo predicted that each country would eventually recognize these facts and stop attempting to make the product that was more costly to generate. In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost Opportunity CostOpportunity cost is one of the key concepts in the study of economics and is prevalent throughout various decision-making processes. a. for two goods 1 and 2, then –eld 2 has a comparative advantage in good 2.2 1In line with Ricardo™s theory of comparative advantage, the focus of our paper is on the supply-side of the economy, not the demand-side considerations that would ultimately pin down prices around the world. Absolute advantage is the ability of an entity to produce a greater quantity of the same good or service with the same constraints than another entity. b. b. Is Demand or Supply More Important to the Economy? To produce $25 in income from secretarial work, the attorney must lose $175 in income by not practicing law. Comparative Advantage and the Gains from Trade Part 1: Multiple Choice Select the best answer of those given. Comparative advantage is determined by differences in the labour hours requires to produce each good. Comparative advantage in sleds. Michael Jordan would likely be able to, say, paint his house quickly, owing to his abilities as well as his impressive height. of comparative advantage™; see Paul Samuelson (1995, p. 22). Absolute advantage and comparative advantage are two important concepts in economics and … Comparative advantage in clarinets. 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. 11th - 12th grade. Comparative advantage. As a renowned basketball and baseball star, Michael Jordan is an exceptional athlete whose physical abilities surpass those of most other individuals. Rent seeking occurs when one group organizes and lobbies the government to protect its interests. A comparative advantage gives a … Your email address will not be published. Factors of Production. How Does Government Policy Impact Microeconomics? The greater the diversity in people and their skills, the greater the opportunity for beneficial trade through comparative advantage. The principle of comparative advantage applies to countries as well as to individuals. A. actual differences in labor productivity between countries B. relative differences in labor productivity between countries C. Both (a) and (b) D. Neither (a) nor (b) Mcq Added by: Adden wafa. SURVEY . 2. ... Country A has the comparative advantage in shirts & Country B has the comparative advantage in chairs. In order to determine if comparative advantages exist between the two countries, you have to figure out the opportunity cost of making one unit of one of the items. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. 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. Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. Comparative Advantage can be defined as a firm’s or the organization’s comparative advantage that is its ability to produce service or goods when compared to another firm or entity at a lower cost of opportunity. Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. What Factors Influence a Change in Demand Elasticity? © Copyright 2016-2020 - www.PakMcqs.com/. The secretary is much better off typing and organizing for the attorney; their opportunity cost of doing so is low. Why doesn't the world have open trading between countries? However, this is not a long-term solution to a trade problem. David Ricardo famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages. b. Comparative advantage is a term associated with 19th Century English economist David Ricardo. BIBLIOGRAPHY. 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The trade is determined by differences in the table at the expense of others why is! Allow for higher levels of value production by organizing labor more efficiently, capital-intensive labor from. Country a has the comparative advantage to determine Brunei ’ s comparative advantage … advantage... Firms with subsidies ( e.g., through fiscal transfers ) and protections by in.
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