In economics, comparative advantage refers to the ability of a person or nation to produce a good or service at a lower opportunity cost than another person (or nation). This is why trade can create value for both parties—because each person can concentrate on
the activity for which they have the lower opportunity cost. It also explains why Tiger Woods shouldn’t mow your lawn. The term “comparative advantage” is usually attributed to David Ricardo. In his 1817 book On The Principles Of Political Economy And Taxation, Ricardo used the example of trade between England and Portugal. Portugal could produce both wine and cloth with less labor than it would have taken to produce the same output in England. However, the relative costs are different (currencies have different values). From Ricardo’s point of view, England had difficulty producing wine and very little difficulty producing cloth. Portugal, however, could easily produce both wine and cloth. Ricardo concluded that while it was cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to
produce excess wine and trade this for English cloth. England would benefit from this trade because its cost of producing cloth has not changed but it can now get wine at a lower price. Thus, each country can gain by specializing in the good that has a comparative advantage. One of the drawbacks of trade in this way is that it creates increasing interdependence among people or nations. In Ricardo’s example, England and Portugal relied on each other for certain goods. This is possible as long as it is in the self-interest of each nation and there are no disruptions. In the leading economics textbook, Principles of Microeconomics, Greg Mankiw offers the following:
Real Life ExamplesShould Tiger Woods Mow His Own Lawn?
(Another example, this one from wikipedia)
How can a country specialize in its economy?A) A country can specialize by using all available resources to produce goods and services to avoid trading with other countries. B) A country can specialize by using all available resources to invest in capital goods to promote economic growth.
Can a nation have a comparative advantage in the production?A nation cannot have a comparative advantage in the production of every good. import goods in which it has a comparative disadvantage. The concept of __________________, means that as the measure of output goes up, average costs of production decline—at least up to a point. no one country produces all of what citizens within the country want.
What happens when two countries specialize in an activity?Occur when two countries specialize in the activity in which they have a comparative advantage, trade, and then both gain. Which of the following terms best defines the ability of one individual, business, or country to produce a good at a lower opportunity cost than another entity can? Nice work!
What is often described as the global economy?The world is often described as having a global economy. How important is international trade to the United States? A. The U.S. exports fewer goods than any of the other 8 highest income countries.
What do we call it when a nation or individual can produce a good more efficiently than another nation or individual?The concept of absolute advantage was developed by 18th-century economist Adam Smith in his book The Wealth of Nations to show how countries can gain from trade by specializing in producing and exporting the goods that they can produce more efficiently than other countries.
What is it called when a country is able to produce more of a given product than another country?KEY Points. Absolute advantage: In economics, the principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
What is absolute and comparative advantage?Absolute Advantage: The ability of an actor to produce more of a good or service than a competitor. Comparative Advantage: The ability of an actor to produce a good or service for a lower opportunity cost than a competitor.
What does it mean for an individual or country to specialize in the production of goods or services?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.
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