By contrast, Jordan's neighbor Joe could paint the house in 10 hours. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. The law of comparative advantage says that a person should produce a good if he or she: a. has the greatest desire to consume that good. Michael Jordan would likely be able to, say, paint his house quickly, owing to his abilities as well as his impressive height. Understanding Microeconomics vs. Macroeconomics, Differentiate Between Micro and Macro Economics, Microeconomics vs. Macroeconomics Investments. The law of comparative advantage says that a person should produce a good if he or she... a. has the greatest desire to consume that good b. has the lowest opportunity cost of producing that good c. has an absolute advantage in a related activity d. has a comparative advantage in a related activity e. is equally good at producing this good as someone else is 4. b. has the lowest opportunity cost of producing that good. However, unlike absolute advantage, comparative advantage considers opportunity cost. 1 decade ago. The law of comparative advantage says that there is only advantage to be had from free trade between countries. Nations that are blessed with an abundance of farmland, fresh water, and oil reserves have an absolute advantage in agriculture, gasoline, and petrochemicals. Why doesn't the world have open trading between countries? What Factors Influence a Change in Demand Elasticity? b. has the lowest opportunity cost of producing that good. 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. The Theory of Comparative Advantage Explained Adapted from Free Trade Doesn’t Work: What Should Replace It and Why, by Ian Fletcher (USBIC, 2010) T HE THEORY OF COMPARATIVE advantage All the myriad things we are told about why free trade is good for us are boiled down to hard economics and weighed against the costs by this theory and its modern ramifications. Today, I’d like to discuss Ricardo's law of comparative advantage and Miss Universe. 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. The law of comparative advantage says that a person should produce a good if he or she: a. has the greatest desire to consume that good. 1.The law of comparative advantage says that a person should produce a good if he or she: A. has a comparative advantage in a related activity. 7. Comparative advantage focuses on the opportunity cost of using resources. C. has the greatest desire to Simplified theory of comparative advantage. Comparative advantage is an economic law, dating back to the early 1800s, that demonstrates the ways in which protectionism (or mercantilism as it was called at the time) is unnecessary in free trade. Favorite Answer. The economic case for an open trading system based on multilaterally agreed rules is simple enough and rests largely on commercial common sense. The United States’ comparative advantage is in specialized, capital-intensive labor. . When there is free trade, why do some countries remain poor at the expense of others? An aprioristic law that is true in economics, such as that of comparative advantage, knows no national boundaries. [1] In an economic model , agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. Comparative advantage is a key insight that trade will still occur even if one country has an absolute advantage in all products. Comparative advantage is contrasted with absolute advantage. Deardorff: The Limits of Comparative Advantage 3 There are other extensions, however, that I do not cover here and that would also be important. The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage. Sciences, Culinary Arts and Personal To see the difference, consider an attorney and their secretary. In Deardorff [1985], for 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. But it is also supported by evidence: the experience of world trade and economic growth since the Second World War. Understanding Elasticity vs. Inelasticity of Demand, Factors Determining the Demand Elasticity of a Good. Wider gaps in opportunity costs allow for higher levels of value production by organizing labor more efficiently. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production. theory, analytical tool and case studies of comparative advantage. As an example, consider a famous athlete like Michael Jordan. 3. The secretary can produce $0 in legal services and $20 in secretarial duties in an hour. Influential is something that economists call rent seeking occurs when one group and... 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