Comparative advantage

• What is the basis of absolute advantage in international trade?

  Producing more with the same resources
• What does absolute advantage imply about a country's productivity?

  It is more productive than another
• What is another term for the raw cost of production?

  Absolute cost
• Which economist introduced the concept of comparative advantage?

  David Ricardo
• What is the primary limitation of absolute cost, according to Ricardo?

  It doesn't include opportunity cost
• What is opportunity cost?

  A cost in economics
• What does the relative cost of production include?

  Opportunity cost
• What does the law of comparative advantage state a country should do?

  Specialize where opportunity cost is lower
• What are the two fundamental aspects of the law of comparative advantage?

  • Specialization in goods/services with lower opportunity cost
  • Trade with other countries
• Why is opportunity cost fundamental to comparative advantage?

  Lowest cost producer needs lowest opportunity cost
• What does relative cost indicate?

  Opportunity cost is included
• According to comparative advantage, what is more important than absolute cost?

  Relative cost
• In a table showing India and Ghana's production of cotton and computers, what does the data represent?

  Production with the same resources
• If India can make 20 tons of cotton or 10 computers and Ghana can make 16 tons of cotton or 2 computers, which country has the absolute advantage in both goods?

  India
• Why doesn't absolute advantage in all goods necessarily mean a country has comparative advantage in all goods?

  Opportunity costs must be considered
• What does a table showing opportunity costs for India and Ghana represent?

  What each country gives up
• How do you calculate the opportunity cost of India making one ton of cotton, given they can make 20 tons of cotton or 10 computers?

  Divide 10 computers by 20
• If India makes one computer, giving up two tons of cotton, and Ghana makes one computer, giving up eight tons of cotton, which country has a comparative advantage in making computers?

  India
• If it costs India half a computer to make one ton of cotton and it costs Ghana one-eighth of a computer to make one ton of cotton, who has the lower opportunity cost for cotton?


  Ghana
• If India has a comparative advantage in computers and Ghana in cotton, what should India do?

  Specialize in computer production
• According to the theory, what should Ghana do in this scenario?

  Specialize in cotton production
• What is the potential outcome of specialization and trade based on comparative advantage?

  Mutually beneficial trade
• What is the importance of opportunity cost to Economist?

  It can't be understated
• What does a Production Possibility Frontier (PPF) diagram used to showcase?

  Comparative advantage
• In a PPF diagram with computers and cotton on the axes, what do the points on India's PPF represent?

  Maximum output combinations for India
• If India can make 10 computers or 20 tons of cotton, how is this represented on a PPF?

  By connecting those two points
• What is recommended if you need to work out comparative advantage from a PPF diagram?

  Work out opportunity cost in a table
• What does the "nifty trick" involving the slope of PPFs suggest?

  Shallower PPF has comparative advantage on x-axis
• According to the "nifty trick", if Ghana has a shallower PPF, what does that imply?

  Comparative advantage with cotton
• What are the key conclusions from comparative advantage?

  • Maximum output of goods and services
  • Higher consumption possibilities
  • Lowest prices
  • Allocative efficiency
• What happens as countries divert resources to efficient production?

  Maximum output of that production
• What happens with consumption possibilities under comparative advantage?

  Countries can consume beyond their PPFs
• Why do lower prices result from comparative advantage?

  Lowest opportunity cost Global producer
• How does comparative advantage lead to allocative efficiency?

  Resources to most efficient countries
• What does allocative efficiency imply in resource use?

  Making best use of scarce resources
• What is one source of a country's comparative advantage?

  High factor endowment
• What gives China comparative advantage in manufacturing?

  Large labor force
• What gives sub-Saharan African countries comparative advantages in agriculture?

  Fertile soil
• What is another source of a country's comparative advantage besides luck?

  High productivity of factors
• What gives the UK a comparative advantage in financial services?

  Highly skilled workforce