Ricardo used the theory of comparative advantage to argue against Great Britain’s protectionist Corn Laws, which restricted the import of wheat from 1815 to 1846. If you do everything better than anyone else, should you be self-sufficient and do everything yourself? Indeed, some variation of Ricardo’s example lives on in most international trade textbooks today. Winter Term 2013 Comparative Advantage Study Questions (with Answers) Page 5 of 6 (8) a. The quantity demanded of a good is the amount that buyers are-willing to purchase -willing and able to purchase-willing able and need to purchase-able to purchase. willing and able to purchase. Which of the following events must cause equilibrium price to rise? Trade makes firms behave more competitively, reducing their market power. Comparative advantage is related to the opportunity cost (the cost of next best alternative forgone). Differences Between Absolute and Comparative Advantage. Which of the following is an example of a market? What we're going to see is if both of these parties specialize in their comparative advantage and then trade, they can get outcomes that are beyond each of their individual production possibility frontiers. production achieved if each person concentrates on the activities for which his or her opportunity cost is lowest, Economic pie is maximized, making possible the largest slice for everyone, A graph that describes the max. For instance, Saudi Arabia has a natural comparative advantage with its huge reserves of oil. 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.. In economics, the term is often applied to entire nations and their economies. The … How is it related to the idea of free trade? Specialization and comparative advantage are separate but related concepts. Because the idea of comparative advantage is not immediately intuitive, the best way of presenting it seems to be with an explicit numerical example as provided by Ricardo. Comparative advantage does not impact the international division of labor, and I disagree with the idea. The theory of comparative advantage is similar and related to that of absolute advantage, but the two economic concepts are definitely distinct. c. raise the price of the cinnamon rolls. Comparative advantage: The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth. The principle of comparative advantage has been criticized for a number of reasons which, in general terms, tend to focus on the idea that a developing economy which specializes in labor-intensive goods will find itself limited or blocked from achieving full modernization. The proliferation of brand clothing labels. The concept of absolute advantage is generally attributed to Adam Smith for his 1776 publication The Wealth of Nations in which he countered mercantilist ideas. This year, her income is $50,000, and she purchased 10 pairs of designer jeans. The comparative advantage model is simplistic and may not reflect the real world (for example, only two countries are taken into account). The theory of comparative advantage is attributed to political economist David Ricardo, who wrote the book Principles of Political Economy and Taxation (1817). For a more complete history of these ideas, see Douglas A. Irwin, Against the Tide: An Intellectual History of Free Trade (Princeton, NJ: Princeton University Press, 1996). opportunity costs of producing each good, slope becomes steeper as consumers move downward along the curve, "Low- Hanging Fruit Principle" -- States that in expanding the production of any good, a society should employ resources w/ lower opportunity cost (efficient) before moving on to those w/ higher opportunity costs (not efficient), Any combination of goods that can be produced using currently available resources, Any combination of goods that cannot be produced using currently available resources, Any combination of goods for which currently available resources enable an increase in the production of one good w/o a reduction in the production of the other, Any combination of goods for which currently available resources do not allow an increase in the production of one good w/o a reduction in the production of the other, Investing in new factories & equipment, population growth, and improvements in knowledge and technology, Benefits of exchange tend to be larger the larger the differences are b/w the trading partners' opportunity costs, Term increasingly used to connote having services performed by low-wage workers overseas, A good/service that is available for immediate consumption and doesn't add to the future productive ability of the nation (e.g. c. the rate of tradeoff between the two goods being produced is constant. c. Kelly has a comparative advantage in repairing cars and in cooking meals. The more responsive buyers are to a change in price, the. Surprisingly, economists say ‘not necessarily.’ An economy with a comparative advantage, however, should be producing it. So what we can see is, for example, they can get an outcome where they are each able to get 15 cups and 15 plates, which would have been impossible left to their own devices. Which of the following is not a determinant of the price elasticity of demand for a good? Competitive Advantage vs. In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. Absolute advantage describes the overall ability of a country to produce a good better and with fewer resources than another country. Some of the main ideas of our analysis are best illustrated by a simple example. b. beef and Zardia should specialize in the production of wheat. It is not possible for a country to have a comparative advantage … Years ago, thousands of country music fans risked their lives by rushing to buy tickets for a Willie Nelson concert at Carnegie Hall. For example, in a single day, Owen can embroider $10$ pillows and Penny can embroider $15$ pillows, so Penny has absolute advantage in embroidering pillows. When considering competitive advantage, it's important to understand comparative advantage as well. All firms can take advantage of cheap labor. 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. What would we expect to occur in this market? Which of the following is a valid expression for price elasticity of demand? Comparative Advantage Examples. But mostly I will just provide a couple of numerical examples. The upshot is quite extraordinary: Everyone stands to gain from trade. However, if an economy doesn’t have an absolute advantage, should it not be producing that good? A production possibilities frontier is a straight line when. Costs are higher in one country than in another. 12 bushels of wheat for 19 pounds of beef. Kelly and David are both capable of repairing cars and cooking meals. Podcast at EconTalk. Comparative Advantage and Gender Gaps in Math Self-Concept, Interest for Math, and Other Math-Related Attitudes Gender differences in math self-concept (i.e., how students perceive their math ability and their ability to learn math quickly) is one of the most commonly advanced explanations for the gender gap in math enrolment ( 1 , 28 , 29 ). Related Literature. Suppose goods A and B are substitutes for each other. c. all nonprice determinants of supply are held constant. What is Andia's opportunity cost of producing one pound of beef? Eg. Popularly attributed to English economist David Ricardo and his 1817 book “Principles of Political Economy and Taxation,” the law of comparative advantage refers to a country’s ability to produce goods and provide services at a lower cost than other countries. The country may not be the best at producing something. Hewlett and Packard started their computer business. Discussion of comparative advantage and critiques starts at time stamp 16:21. Demand is inelastic if the price elasticity of demand is. It is commonly used to compare the economic outputs of different countries (or individuals). Comparative Advantage One person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost (more efficient) -- Fundamental basis for international trade Of a country has this ability, it 's important to understand comparative advantage is to. 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