Comparative advantage is what you do best while also giving up the least. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. That’s because you’ll make more money as a plumber.

Absolute advantage refers to the uncontested superiority of a country or business to produce a particular good better. Comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production diversification.

Mercantilism was called as a zero-sum game as only one country benefitted from it. Given by Adam Smith in 1776, the theory of absolute advantage stated that a country should specialize in those products, which it can produce efficiently. This theory assumes that there is only one factor of production that is labor.

Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

In international trade, no country can have a comparative advantage in the production of all goods or services. In economic terms, a country has a comparative advantage when it can produce at a lower opportunity cost than that of trade partners.

Comparative advantage is when a country can produce a good with the least opportunity cost. In this example, the opportunity for iron ore is 1.25 cars in China and 0.71 cars in Australia. As Australia has the lowest opportunity cost for iron ore, it, therefore, has a comparative advantage in the production of iron ore.

A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else. Having a comparative advantage is not the same as being the best at something.

A four step solution to solving the comparative advantage and gains from trade problem.

1. Determine the opportunity costs of production.
2. Figure out who has the comparative advantage.
3. Have each country specialize in their comparative advantage.
4. Figure out an allocation that makes each country better off.

Fluctuations in the exchange rate, which affect the relative prices of exports and imports and cause changes in demand from domestic and overseas customers. Import controls such as tariffs, export subsidies and quotas – these can be used to create an artificial comparative advantage for a country’s domestic producers.

Differences in geography, climate and natural resources give some countries a comparative advantage over others. Different countries may also have different proportions of capital to labor, or high-skill labor to low-skill labor.

Because Saudi Arabia produces oil very cheaply, it holds a comparative advantage in oil, and it exports oil in order to finance its purchases of imports. Similarly, countries with large forests generally are the major exporters of wood, paper, and paper products.

1 Some of the factors that influence comparative advantage include the cost of labor, cost of capital, natural resources, geographic location, and workforce productivity. Comparative advantage has influenced the way economies work from the time that countries first started trading with each other many centuries ago.

The model predicts that China has a comparative advantage in heavy goods in nearby markets, and lighter goods in more distant markets. This theory motivates a simple empirical prediction: within a product, China’s export unit values should be increasing in distance.

Assumptions of the Theory: (2) They produce the same two commodities, X and Y. ADVERTISEMENTS: (3) Tastes are similar in both countries. (4) Labour is the only factor of production.

Among the notable ideas that Ricardo introduced in Principles of Political Economy and Taxation was the theory of comparative advantage, which argued that countries can benefit from international trade by specializing in the production of goods for which they have a relatively lower opportunity cost in production even …

The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare. Note, this is different to absolute advantage which looks at the monetary cost of producing a good.

The Comparative cost theory is the basis of international trade. It explains that “it pays countries to specialize in the production of those goods in which they possess greater comparative advantage or the least comparative disadvantage.”

Ricardian equivalence is an economic theory that says that financing government spending out of current taxes or future taxes (and current deficits) will have equivalent effects on the overall economy. For this reason, Ricardian equivalence is also known as the Barro-Ricardo equivalence proposition.

: of or relating to the English political economist Ricardo or to his theory of rent as an economic surplus.

Best example of the behavior predicted by the theory of Ricardian equivalence? An individual that increases saving in response to a tax cut in anticipation of future tax increases.

One reason that Ricardian equivalence is likely not to be exactly correct is that there is turnover in the population. When new individuals are entering the economy, some of the future tax burden associated with a bond issue is borne by individuals who are not alive when the bond is issued.

The theory of Ricardian equivalence suggests that any increase in government borrowing will be offset by additional private saving, while any decrease in government borrowing will be offset by reduced private saving. Sometimes this theory holds true, and sometimes it does not hold true at all.

Automatic stabilizers increase aggregate demand during recessions and reduce aggregate demand during expansions. Automatic stabilizers lead to changes in taxation and government spending as economic output varies.

Which of the following is a basic assumption of the Ricardian equivalence theorem? Consumers consider future tax payments when deciding how much to spend and save today. the government increases spending in an area that competes with the private sector.

Ricardian Equivalence Theorem. a theorem proposing that an increase in the government budget deficit has no effect on aggregate demand. Fiscal Policy. the discretionary changing of government expenditures or taxes in order to achieve national economic goals.

We show that Ricardian Equivalence continues to hold provided suitable additional conditions on learning dynamics are satis- fied. However, new cases of failure can also emerge under learning.

Which of the following best describes the crowding-out effect? Additional government borrowing accompanying larger budget deficits will increase interest rates and reduce private spending. budget deficits that lead to higher interest rates reduce private investment spending.

spending

Which of the following is an example of crowding out? The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, raises the interest rate and thereby reduces investment spending.

Increased government expenditure financed by budget deficits i.e., printing of additional notes, produces an impact on the money market. Thus, the phenomenon, whereby increased government expenditure may lead to a squeezing of private investment expenditure, is referred to as the crowding-out effect.