Comparative Advantage
Definition
Comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost compared to other countries. It is the basis for international trade and specialization.
Analogy
Imagine you and your friend both have chores to do - cleaning your room and washing dishes. If you are faster at cleaning your room but slower at washing dishes, it would be more efficient for you to focus on cleaning while your friend focuses on dishwashing. This way, each of you specializes in what you're best at, just like countries with comparative advantage specialize in producing what they're most efficient in.
Related terms
Allocative Efficiency: Allocative efficiency refers to the optimal allocation of resources in a way that maximizes societal welfare. It occurs when resources are allocated in such a way that the marginal benefit equals the marginal cost.
Productive Efficiency: Productive efficiency refers to producing goods and services at the lowest possible cost. It occurs when an economy is producing on its production possibility frontier, utilizing all available resources efficiently.
Opportunity Cost: Opportunity cost is the value of the next best alternative foregone when making a decision. It represents what must be given up in order to obtain something else.
"Comparative Advantage" appears in:
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Practice Questions (5)
- Comparative advantage is based on?
- Comparative advantage questions often focus on?
- Which type of problem focuses on resource usage to determine absolute and comparative advantage?
- In input problems, comparative advantage is determined by?
- In the context of international trade, if Country X has a comparative advantage in producing wheat over country Y, which of the following scenarios is likely to occur?
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