Indeed, as time went on, England stopped producing wine, and Portugal stopped manufacturing cloth. 11th - 12th grade. B. relative differences in labor productivity between countries In particular, the factor of production capital is not a natural resource, and so may come outside the scope of the theory. Output Per Hour Of Work Smartphones Fitness Bracelets 9 12 6 5 Switzerland Canada Which Of The Following Statements Is True? According to the theory of comparative advantage, which of the following is not a reason why countries trade? 1. 4. Competitive Advantage, Comparative Advantage in International Trade, Government Imposed Quota Can Limit Imports and Exports, What the Production Possibility Frontier (PPF) Curve Shows, Competitive Advantage: What Gives Companies an Edge, Economists' Assumptions in their Economic Models, Understanding Positive vs. Normative Economics. Owing to their diversity of skills, Michael Jordan and Joe would likely find this to be the best arrangement for their mutual benefit. The secretary can produce $0 in legal services and $20 in secretarial duties in an hour. A comparative advantage gives a … Costs are higher in one country than in another. Put simply, an opportunity cost is a potential benefit that someone loses out on when selecting a particular option over another. They are better off by producing an hour's worth of legal services and hiring the secretary to type and organize. Both countries saw that it was to their advantage to stop their efforts at producing these items at home and, instead, to trade with each other in order to acquire them. Foreign demand will tend to drive up (down) the autarky price of a country's comparative advantage (disadvantage) good, raising short term profits and attracting resources to that industry. A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor. Comparative advantage is determined by differences in the labour hours requires to produce each good. In Ricardo’s theory, differences in the productivity of labour accounted for comparative advantage. 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. 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. Assume that Sri Lanka completely specializes in production of its comparative advantage good, and trades 22,000 units of it to Brunei for 100,000 units of Brunei’s comparative advantage good. By using Investopedia, you accept our. D. Neither (a) nor (b). 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. However, this is not a long-term solution to a trade problem. 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. 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. This involves for example, providing non-viable firms with subsidies (e.g., through fiscal transfers) and protections. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. The Opportunity Cost For Switzerland To Produce One Smartphone Is 0.75 Fitness Bracelet, B. 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. Comparative advantage in sleds. Comparative advantage. a. Economics Mcqs for Lecturer & Subject Specialist Exams. Comparative Advantage DRAFT. b. 11th - 12th grade. Required fields are marked *. Question: Using The Numbers In The Table, Determine Which Country Has A Comparative Advantage In Producing Each Product. C. Both (a) and (b) As an example, consider a famous athlete like Michael Jordan. Recall that: France enjoys a comparative advantage in wine. Countries that implement the CAD strategy promote the development of advanced capital-intensive (heavy) industries that are not consistent with their comparative advantage, which is determined by their factor endowments. It is similar to, but distinct from, comparative advantage. is perhaps the most important concept in international trade theory. 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. b) absolute costs of production in each country after accounting for inflation. 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. Opportunity cost measures a trade-off. 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. Comparative advantage suggests that countries will engage in trade with one another, exporting the goods that they have a relative advantage in. What Factors Influence Competition in Microeconomics? So long as Michael Jordan makes the expected $50,000 and Joe earns more than $100, the trade is a winner. 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 A. actual differences in labor productivity between countries Which of the following statements is a fair comparison of the Heckscher-Ohlin theory and the Ricardo theory (i.e. 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. The goal of this paper is to assess the empirical performance of Ricardo™s ideas. 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. 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. Balance of Payments, Aid and Foreign Investment, Characteristics and Institutions of Developing Countries, Exchange-Rate Systems And Currency Crises. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. of comparative advantage™; see Paul Samuelson (1995, p. 22). Absolute advantage refers to the uncontested superiority of a country to produce a particular good better. Suppose that Australia and Brazil have the outputs per worker in producing sleds and clarinets shown in the table at the right. Differences Between Absolute and Comparative Advantage. These resources come from the import competing comparative disadvantage sector. David Ricardo famously showed how England and Portugal both benefit by specializing and trading according to their comparative advantages. Between two countries, comparative advantage is found by comparing the: a) relative costs of production in each country. For Country A, for every 1 gun that they make they have to give up 2 lbs. Here, the role of opportunity cost is crucial. ... What matters is comparative advantage. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. (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. Explain how market forces lead … And for every pound … ... Country A has the comparative advantage in shirts & Country B has the comparative advantage in chairs. When there is free trade, why do some countries remain poor at the expense of others? 38. People learn their comparative advantages through wages. Another way to think of comparative advantage is as the best option given a trade-off. What Does the Law of Diminishing Marginal Utility Explain? Which of the following is true? 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. Comparative advantage in clarinets. (One should not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Tags: Question 6 . How Countries Use Competitive Advantage . © Copyright 2016-2020 - www.PakMcqs.com/. 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. SURVEY . the following production points, decide whether that ... about how trade is determined by comparative advantage, answer the following questions. What Is the Concept of Utility in Microeconomics? Explain when a country has a comparative advantage over another country. 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. A major factor that affects comparative advantage is the country’s quality and quantity of the factors of production. What Factors Influence a Change in Demand Elasticity? Use the following information to determine Brunei’s gains from trade. 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. 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. 3. Then Brazil has a a. here you will find the the Baisc to Advance and most Important Economics Mcqs for your test preparation. Question: Determining Absolute And Comparative Advantage There Are Two Ways To Approach Comparative Advantage And Opportunity Cost. Differences Between Absolute and Comparative Advantage. a. The attorney is better at producing legal services than the secretary and is also a faster typist and organizer. The principle of comparative advantage applies to countries as well as to individuals. The following example presents a hypothetical example of two countries: Japan and China both producing fish and cloth, and assuming labor is the only input. Explain how two countries determine their terms of trade. In this case, Portugal was able to make wine at a low cost, while England was able to cheaply manufacture cloth. It’s where their comparative advantage lies. The offers that appear in this table are from partnerships from which Investopedia receives compensation. In this example, Joe has a comparative advantage, even though Michael Jordan could paint the house faster and better. Specialization is a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency. Tags: Question 6 . A quota or protectionism is a government-imposed trade restriction limiting the number or value of goods a nation imports or exports during a specific time. Comparative advantage is determined by comparing the opportunity cost of each good in different countries. b. American workers produce sophisticated goods or investment opportunities at lower opportunity costs. Comparative advantage theory is a static theory and does not take account of some of the more dynamic elements determining world trade. More simply, this means that a … 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. Your email address will not be published. If a country removes itself from an international trade agreement, if a government imposes tariffs, and so on, it may produce a local benefit in the form of new jobs and industry. Comparative advantage is determined by ? Adherents to this analytical approach believe that countries engaged in international trade will have already worked toward finding partners with comparative advantages. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. b. Perhaps comparative advantage does not work as suggested. 2. Which country has the comparative advantage in aircraft 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.. What Is the Utility Function and How Is it Calculated? The greater the diversity in people and their skills, the greater the opportunity for beneficial trade through comparative advantage. Economics Mcqs for test Preparation from Basic to Advance. Comparative advantage is determined by which person or group of persons can produce a given quantity of a good using the fewest resources. In production of trousers, slacks, and jeans? Understanding Elasticity vs. Inelasticity of Demand, Factors Determining the Demand Elasticity of a Good. a. comparative advantage) of free trade? 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. Absolute advantage and comparative advantage are two important concepts in economics and … The United States enjoys a comparative advantage … 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. Economics Mcqs. How Does Government Policy Impact Microeconomics? c. Absolute advantage in sleds. d. 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. b. Chinese workers produce simple consumer goods at a much lower opportunity cost. To produce $25 in income from secretarial work, the attorney must lose $175 in income by not practicing law. It is also a foundational principle in the theory of international trade. Understanding Microeconomics vs. Macroeconomics, Differentiate Between Micro and Macro Economics, Microeconomics vs. Macroeconomics Investments. 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.. Comparative advantage is closely associated with free trade, which is seen as beneficial, whereas tariffs closely correspond to restricted trade and a zero-sum game. In the case of comparative advantage, the opportunity cost (that is to say, the potential benefit which has been forfeited) for one company is lower than that of another. Competitive advantage refers to factors that allow a company to produce goods or services better or more cheaply than its rivals. Specializing and trading along these lines benefit each. Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. Absolute and Comparative Advantage. 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. The purpose of this paper is to demonstrate the validity of a weak form of the law of comparative advantage, that is, that the pattern of international trade is determined by comparative advantage. 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. It is also one of the most commonly misunderstood principles. PLEASE COMMENT BELOW WITH CORRECT ANSWER AND ITS DETAIL EXPLANATION. 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. A country can also create competitive advantage, a practice that's called national competitive advantage or comparative advantage. One Approach, The Output-per-fixed-input Approach, Appears On The Trade Infographic Of Week 6. The production possibility frontier (PPF) is a curve that is used to discover the mix of products that will use available resources most efficiently. Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 3 of 6 (8) 6. In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. The United States’ comparative advantage is in specialized, capital-intensive labor. 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. The following example of Comparative Advantage provides an overview of the most popular comparative advantages. A nation with a comparative advantage makes the trade-off worth it. Why doesn't the world have open trading between countries? Use the law of comparative advantage to determine what goods countries will specialize in. The prices of goods and services are usually determined by the government. Comparative Advantage: An Overview . Comparative Advantage Definition. Comparative Advantage and the Gains from Trade Part 1: Multiple Choice Select the best answer of those given. Is Demand or Supply More Important to the Economy? Factors of Production. BIBLIOGRAPHY. 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