Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade patterns, absolute advantage or comparative advantage? Why?
Absolute advantage refers to productivity, as in the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost. Comparative advantage is the principle upon which trade patterns are based. Comparative advantage is based on opportunity cost, and opportunity cost measures the real cost to an individual or country of producing a particular product. Opportunity cost is therefore the information necessary for an individual or nation to determine whether to produce a good or buy it from someone else.
You might also like to view...
In the kinked demand curve model, the demand curve is ________ for price increases and ________ for price decreases
A) unit elastic; relatively elastic B) relatively inelastic; relatively elastic C) relatively elastic; relatively inelastic D) perfectly elastic; perfectly inelastic
Denmark has a comparative advantage in cheese production, and Holland has a comparative advantage in beer production
The two countries initially trade cheese and beer based on their comparative advantages, but the government of Denmark later closes the border to trade with Holland. What is the likely impact of this trade restriction? A) Danish cheese consumers are worse off, and beer producers in Holland are better off. B) Cheese consumers in both countries are worse off. C) Beer consumers in Holland are worse off, and cheese producers in Denmark are better off. D) Beer consumers in Holland are better off, and cheese producers in Holland are better off.