1.3 Comparative Advantage and Gains from Trade

• Comparative advantage refers to the ability of a country to produce a good at a lower opportunity cost
• Match the concept with its focus:

  Absolute Advantage ↔️ Productivity

  Comparative Advantage ↔️ Opportunity Cost
• If the US has a lower opportunity cost for wheat, it has a comparative advantage in wheat production.


  True
• Absolute advantage focuses on productivity, while comparative advantage focuses on opportunity cost.


  True
• Gains from trade arise when countries specialize based on their comparative advantages
• Why is the opportunity cost principle important for comparative advantage?

  Determines trade benefits
• What is the role of the opportunity cost principle in international trade?

  Underpins comparative advantage
• Absolute advantage refers to the ability to produce more efficiently using fewer resources
• What is the primary focus of comparative advantage?

  Opportunity cost
• What is absolute advantage defined as?

  Produce more efficiently
• What does the opportunity cost principle state?

  Cost is next best alternative
• Steps leading to gains from trade

  1️⃣ Identify comparative advantage

  2️⃣ Specialize in production

  3️⃣ Trade goods or services

  4️⃣ Achieve increased efficiency
• Comparative advantage is the ability to produce a good at a lower opportunity cost
• Match the concept with its definition:

  Opportunity Cost ↔️ Value of next best alternative

  Comparative Advantage ↔️ Lower opportunity cost of production
• The United States has an absolute advantage in both wheat and cloth production over Mexico.


  True
• Absolute advantage emphasizes productivity, while comparative advantage emphasizes opportunity cost
• Gains from trade arise from specialization and exchange based on opportunity costs
• Country A's opportunity cost of wheat is 2 bales of cloth
• Country A's opportunity cost of wheat is 2 bales of cloth
• The United States' opportunity cost of wheat is 0.5 bales of cloth
• Both the United States and Mexico consume more of each good after trade.

  True
• The United States trades 60 tons of wheat for 60 bales of cloth
• What does comparative advantage consider that absolute advantage does not?

  Opportunity costs
• What is comparative advantage based on?

  Lower opportunity cost
• A country has a comparative advantage if it has a lower opportunity cost in producing a good.

  True
• Comparative advantage allows countries to produce more goods collectively when they specialize and trade.


  True
• Both countries consume more wheat and cloth after trade, demonstrating the gains from trade.

  True
• Both countries consume more wheat and cloth after trade, demonstrating the gains from trade.


  True
• The United States has a comparative advantage in wheat, while Mexico has a comparative advantage in cloth.


  True
• The United States' opportunity cost of wheat is 0.5 bales of cloth per ton.


  True
• Absolute advantage is the ability to produce more efficiently using fewer resources
• The United States is more efficient in producing both wheat and cloth compared to Mexico.


  True
• Specialization based on comparative advantage leads to gains from trade and increased overall production.


  True
• The opportunity cost principle states that the cost of an activity is the value of the next best alternative forgone
• Specializing based on comparative advantage and trading allows nations to consume beyond their individual production capabilities
• A country has a comparative advantage in producing a good if its opportunity cost is lower than another country's.


  True
• What is the opportunity cost of wheat in Mexico, given that it can produce 40 tons of wheat or 30 bales of cloth per day?

  0.75 bales of cloth per ton
• Match the concept with its focus:

  Absolute Advantage ↔️ Productivity

  Comparative Advantage ↔️ Opportunity cost
• What are the gains from trade based on?

  Specialization and exchange
• Steps to determine comparative advantage using opportunity cost

  1️⃣ Calculate opportunity cost for each good in each country

  2️⃣ Compare opportunity costs across countries

  3️⃣ Identify where each country has a lower opportunity cost

  4️⃣ Determine comparative advantage