As such, the concepts of development and of advantageous cheap labor are ultimately in contradiction. People succeed in life by specializing at what they do best. Suppose that Australia and Brazil have the outputs per worker in producing sleds and clarinets shown in the table at the right. 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. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. And now what's always interesting about thinking about this is notice, country B has the comparative advantage in toy cars. Static comparative advantage. Trade Absolute Advantage: Comparative Advantage: Concept: It occurs when a country produces better goods and services better than its competitors using the same amount of resources. For Comparative Advantage Input Questions: The country that can produce a set amount of something by using the least resources, land, or time, has the absolute advantage. It occurs when a country produces goods and services at a lower opportunity cost than its competitors. Portugal could produce both wine and cloth with less labor than it would have taken to produce the same output in England. b. Comparative Advantage Exercise. Yet in China as elsewhere, the (potential) comparative advantage of cheap labor may endure only at the cost of labor productivity being kept low and national economy weak. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. But surely John has a comparative advantage in something? The following quiz can be used to test understanding of the comparative advantage concept: With the cost of production of two goods in two different countries, it is possible to calculate how much the two countries could gain from trade. Comparative advantage is an economic term that describes doing what you do best, and leveraging that against what you don't do so well. So John has the comparative advantage in cupcakes. Comparative advantage is what you do best while also giving up the least. And then in belts, 1/2 of a car is less than 3/4 of a car. In economics, absolute advantage refers to the superior production capabilities of an entity while comparative advantage is based on the analysis of opportunity cost. Specialization according to absolute advantage and comparative advantage, and the resulting trade patterns.  Peru can produce 20 cars and 15 tools. Comparative advantage in clarinets. As we know, these trade-offs are measured in opportunity costs. d. Difference Between Absolute Advantage vs Comparative Advantage. c. Absolute advantage in sleds. In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. Differences Between Absolute and Comparative Advantage.  What is the opportunity cost of producing a car in the U.S.? The comparative advantage model is simplistic and may not reflect the real world (for example, only two countries are taken into account). That said, we will learn that it is the comparative advantage that ultimately matters when deciding what countries should produce what goods and services so that they can enjoy mutual gains from trade. Likewise, for countries. 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.. Comparative advantage lies in a country’s ability not at a greater quality or more efficiently, but at a lower opportunity cost. That's because you’ll make more money as a plumber. Preview this quiz on Quizizz. Comparative Advantage. Comparative advantage in sleds. Comparative advantage in toy cars. A developing economy, in sub-Saharan-Africa, may have a comparative advantage in producing primary products (metals, agriculture), but these products have a low-income elasticity of demand, and it can hold back an economy from diversifying into more profitable industries, such as manufacturing. Then Brazil has a a. Comparative Advantage Quiz . Do this by deciding for each product, what would be spent if a set unit was produced. See the entry on positive- and zero-sum situations for a brief explanation of why. Definition: Comparative advantage is defined as the skill of producing a particular good or service more cost-effectively than other producers. Comparative Advantage Definition. An important aspect that is omitted if we only look at absolute advantages is the presence of opportunity costs. Comparative advantage. If they do something where they do not have an advantage over others, then they will not be nearly as successful because of the competition. An absolute advantage is based on the cost to produce something, while a comparative advantage is based on the opportunity cost to produce something. Absolute Advantage, Comparative Advantage, and Opportunity Costs. Comparative advantage is regarded by some economists as an unrealistic concept. While in the time it takes Erica to make one cupcake, she could have made 3 donuts. You can hire an hour of babysitting services for less than you would make doing an hour of plumbing. As such, comparative advantage can be considered as an important concept in global trade, and that’s the reason for several countries to concentrate on trying to make or to produce certain services or goods more efficiently when compared to other countries. Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 3 of 6 (8) 6. This may negate the ability of a nation to exploit it: the realism can be challenged by considering factors such as imperfect factor mobility within an economy; protectionism; transport costs, non–homogenous products; imperfect information among producers and consumers. In other words, it’s when company can produce a better quality product cheaper than its competitors. Make opportunity cost comparisons by creating an “output” matrix first. All countries only have a certain amount of resources available, so they always face trade-offs between the different goods. 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