Here are the steps for calculating comparative advantage:
- 1. Gather data First, find relevant data for both the business and at least one competitor. It's important to know how many goods or units the company and its competitor produces during the same time. ...
- 2. Calculate the opportunity costs Next, you can figure out the opportunity costs for each product or service offered by the company and its competitor. ...
- 3. Compare the opportunity costs
What is the difference between comparative advantage and absolute advantage?
- Absolute and comparative advantages are concepts used in economics and international trade to evaluate product values.
- Absolute advantage evaluates how efficiently a single product can be produced for quality, quantity and profit.
- Comparative advantage helps an entity select between several products to determine which has the greater return.
What gives a company a comparative advantage?
What Gives a Company a Comparative Advantage?
- Environment. A favorable environment for producing a certain type of good gives a company a comparative advantage in producing that good.
- Knowledge and Techniques. Knowledge that enables a company to use more cost-efficient techniques gives the company a comparative advantage.
- Economies of Scale. ...
- Government Regulations. ...
- Product Quality. ...
What gives a country a comparative advantage?
In international trade, countries usually have comparative advantage in different industries and for different reasons. These can be related to natural resources, workers, government investment, or other factors. Countries then trade based on these advantages. Oil-producing nations, for example, have a comparative advantage in chemicals.
What is the principle of comparative advantage?
The principle of comparative advantage states that if countries specialise and produce goods or services to which they have a comparative advantage in, and trade their surplus, they will be better off by consuming more goods and services. Let's go back to our example of Iron ore and Cars with Australia and China.
What factors determine comparative advantage?
The existence of a comparative advantage is, in turn, affected by things such as abundance, productivity, cost of labor, land, and capital. Other factors also might influence a country's comparative advantage in practical terms, such as a highly developed financial system or economies of scale.
How is comparative advantage defined quizlet?
Comparative advantage refers to the ability to produce goods and services at a lower opportunity COST, not necessarily at a greater volume.
How are absolute and comparative advantage determined?
A country has an absolute advantage in those products in which it has a productivity edge over other countries; it takes fewer resources to produce a product. A country has a comparative advantage when a good can be produced at a lower cost in terms of other goods.
What is comparative advantage explain it with an example?
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.
What are the four main sources of comparative advantage?
What are the Sources of Comparative Advantage? Comparative advantage is determined by a country's resources, that is the land, labour, capital and enterprise.
How do you calculate comparative advantage in economics?
In country X, the opportunity cost, or the comparative advantage, of good A is 110 / 100 = 1.1 good B. The opportunity cost of good B in Country X is 100 / 110 = 0.91 good A. In country Y, the opportunity cost, or the comparative advantage, of good A is 80 / 90 = 0.89 good B.
How do you determine absolute advantage?
To calculate absolute advantage, look at the larger of the numbers for each product. One worker in Canada can produce more lumber (40 tons versus 30 tons), so Canada has the absolute advantage in lumber. One worker in Venezuela can produce 60 barrels of oil compared to a worker in Canada who can produce only 20.
Can you have comparative advantage without absolute advantage?
No, as the English economist David Ricardo first explained in the early 1800s. A country can have an absolute advantage in the production of a good without having a comparative advantage. Comparative advantage is what determines whether it pays to produce a good or import it….
What do comparative advantage means?
What Is Comparative Advantage? 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.
Which of the following best describes comparative advantage quizlet?
Which of the following best describes the application of comparative advantage? Development focused on maximizing economic efficiency and well-being by focusing resources to produce whatever the country can produce relatively well compared to other countries and exports them in exchange for goods it does not produce.
Which is an example of comparative advantage quizlet?
the ability to produce a good at a lower opportunity cost than another entity. For example, for every pillow Owen embroiders his opportunity cost is 222 scarves knitted, while Penny must forego 333 scarves for every pillow she embroiders, so Owen has comparative advantage in embroidering pillows.
What is comparative advantage in your own words?
🤔 Understanding comparative advantage A comparative advantage exists when you can produce something at a lower opportunity cost than someone else. In other words, the value of what you gave up to produce the thing is less than it is for another person.
How to find comparative advantage?
It is calculated by finding the opportunity cost for a set of goods. Suppose two neighboring countries produce two sets of similar goods. So to find out the comparative advantage for those two goods we need to find out the opportunity cost for producing one good over the other good as the number of skilled labor is the same. Comparative advantage is calculated as
Why is comparative advantage important?
As we have seen in the example above that if counties produce on the basis of their comparative advantages then the total output in the economy for both countries can be higher. This in a way enhances the chance of the much improved global trade between the two countries. In today’s age of globalization comparative advantage plays a major role. Countries end up producing goods in the region or country which has a higher comparative advantage due to labor, population, or the overall ecosystem.
What are some examples of comparative advantage?
Its examples are - cost, labour, production efficiency, agriculture and industrial. read more Equation to understand it better.
What does it mean when a country produces more goods on an absolute basis?
On an absolute basis, a country can produce more quantity of a particular good in comparison to the quantity produced for the same good in another. But that does not imply that the country which produces more goods on an absolute basis has got an advantage over other countries.
What are economic factors?
Economic Factor Economic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others. read more. that calculates comparative advantage between two countries producing the same goods in their own countries. On an absolute basis, ...
Does Italy produce more cloth?
But on a comparative basis, the opportunity cost for producing a cloth with respect to wine is lesser so Italy should produce more cloth.
Is crude oil a byproduct of chemicals?
A lot of chemicals are by-products of crude oil for which they have huge reserves. So a country that is producing crude has a comparative advantage over a country that is not producing crude in terms of manufacturing chemicals.
Why is comparative advantage important?
An individual, company, or country that has a competitive advantage at producing something can produce the product much more efficiently compared to others at a lower cost. In that sense, the concept of comparative advantage helps companies, individuals, or countries in specializing.
What are the flaws of comparative advantage?
But that assumption doesn’t hold in most cases. Countries impose tariffs, taxes on products which significantly increases the trading costs.
When a country can produce a product with a lower opportunity cost compared to another country, the first country?
When a country can produce a product with a lower opportunity cost compared to another country, the first country is said to have a comparative advantage over the other one .
Which country has the comparative advantage in producing cars over the United States?
I’m going to use the example above to explain this phenomenon to you. From the example, you can see that Mexico has a comparative advantage in producing cars over the United States. So, let’s shift 13 working days from manufacturing aircraft to producing cars in Mexico.
How many cars can Mexico produce?
In the case of Mexico, they can produce 80 cars or 30 aircraft.
Which country has the lowest opportunity cost for cars?
As Mexico has the lowest opportunity cost for cars, therefore, they have a comparative advantage in car production over the United States. In the case of aircraft, the opportunity cost of one unit of an aircraft is 2.5 units of cars in the United States as opposed to 2.667 units of cars in Mexico. As the opportunity cost is the case in ...
What is comparative advantage?
Comparative advantage refers to a country's ability to produce a specific good or service at a lower opportunity cost than its trading partners. Opportunity cost measures a trade-off by representing the potential benefits an investor, business or individual misses out on when they choose one alternative over another. The country with the lowest opportunity cost in a specific area has a comparative advantage. Having a comparative advantage can give a company the ability to sell their goods and services at a lower price than its competitors.
How many bottles of wine can be produced in one hour in Puerto Rico?
In Puerto Rico, one hour of labor can produce either ten bottles of wine or five pieces of cloth. In France, one hour of labor can produce either 20 bottles of wine or 20 pieces of cloth. While France has an absolute advantage in both the production of wine and cloth, Puerto Rico has the comparative advantage in producing wine. This is because if Puerto Rico allocates more of its resources toward wine production and less of its resources toward cloth product, it has a lower opportunity cost than France.
How does a country have a comparative advantage in making chocolate?
For example, if a country is skilled at making both cheese and chocolate, they may determine how much labor goes into producing each good. If it takes one hour of labor to produce 10 units of cheese and one of of labor to produce 20 units of chocolate, then this country has a comparative advantage in making chocolate. This is because for every 10 units of cheese the country produces, they are giving up 10 units of chocolate that they could have produced during the same time period. By allocating more of their resources toward chocolate production instead of cheese production, this company can increase their exports to other countries and improve their revenue margins.
How many motorcycles does Columbia make?
Columbia produces 30 million motorcycles and ten million speed boats each year, while Japan produces 25 million motorcycles and 2.5 million speed boats during the same time period. While Columbia has an absolute advantage in producing both motorcycles and speed boats, it only has a comparative advantage in producing speed boats.
Why is comparative advantage important?
Comparative advantage plays an important role in determining what goods and services certain countries may choose to import or export. Countries can analyze their comparative advantage in different areas to determine what products they can produce at a lower opportunity cost than other countries. If you work in logistics, finance or a government position that involves trade with foreign countries, then understanding how comparative advantage works may benefit you. In this article, we explain what comparative advantage is, discuss why it matters and share six comparative advantage examples that can help you master this economic strategy.
Why do telecommunication companies hire from India?
A telecommunications company in the United States chooses to hire customer service representatives from India because it is more cost effective than opening a new call center in America. They use their savings to provide cheaper internet and phone services than their competitors. Even though their service may not be the best available, customers choose to sign up for their internet and phone plans to save money. In this example, providing a less expensive service outweighs providing a quality service. Therefore, this telecommunications company has a comparative advantage over other telecommunications companies in the United States.
How to calculate Opportunity Cost?
Opportunity cost = (Quantity of good A for Country X) / (Quantity of good B for Country X)
What is the difference between bowed out production possibilities and straight line production possibilities?
a. bowed-out production possibilities frontiers apply to economies that face tradeoffs, whereas straight-line production possibilities frontiers apply to economies that do not face tradeoffs.
What is the inverse of the opportunity cost of one good?
TRUE. For a country producing two goods, the opportunity cost of one good will be the inverse of the opportunity cost of the other good. TRUE. The producer who has the smaller opportunity cost of producing a good is said to have an absolute advantage in producing that good.
What is the driving force of specialization?
d. Absolute advantage is the driving force of specialization.
Which principle applies to countries as well as to individuals?
b. The principle of comparative advantage applies to countries as well as to individuals.
Which country will produce more cars than it would produce in the absence of trade?
c. Germany will produce more cars than it would produce in the absence of trade.
Is the shoemaker good at growing vegetables?
b. the sho emaker is capable of growing vegetables, but he is not very good at it.
Can two people gain from trading?
TRUE. As long as two people have different opportunity costs, each can gain from trade, since trade allows each person to obtain a good at a price lower than his or her opportunity cost. TRUE. Mark is a computer company executive, earning $200 per hour managing the company and promoting its products.
Calculation Step by Step
Example
- Let’s try to grasp the concept of comparative advantage with the help of the following example. Consider this hypothetical situation where the two neighboring countries the United States and Mexico both produce cars and aircraft. The quantity of each product produced by each country is presented in the table below. Find out which country has a comparative advantage over the othe…
Use and Importance of Comparative Advantage
- In economics, the concept of comparative advantage bears great importance. An individual, company, or country that has a competitive advantage at producing something can produce the product much more efficiently compared to others at a lower cost. In that sense, the concept of comparative advantage helps companies, individuals, or countries in specializing. Let’s assume …
Criticism of Comparative Advantage
- Just like any other thing in this world, comparative advantage theory also has some flaws. First of all, the theory assumes there are no trading costs between different countries. But that assumption doesn’t hold in most cases. Countries impose tariffs, taxes on products which significantly increases the trading costs. That’s not all. The comparative advantage model usuall…
Conclusion
- In today’s world of globalization; individuals, companies and nations engage in trades based on their advantages. And most of the time, these advantages are determined based on the theory of comparative advantage. So, learning how to calculate comparative advantagewill also help you understand how you can gain most from your business trades.