What is the relationship between opportunity cost and trading?
The opportunity cost of choosing a project over the other, i.e. it is the alternative you must give up while making a choice. On the other hand, trade-off refers to all the other actions which we could be doing, apart from what we are doing.
What is the relationship between comparative advantage and gains from trade?
Comparative advantage determines which country will specialize in which good. The gains from trade are only based on comparative advantage, not on absolute advantage.
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.
What is comparative cost advantage?
Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. The theory of comparative advantage introduces opportunity cost as a factor for analysis in choosing between different options for production.
How does opportunity costs lead to trade?
In other words, optimizing for opportunity cost leads to acting for comparative advantage, which leads to trade. And trade is the fundamental property of a healthy and active economy.
What are the two components of gains from trade under increasing opportunity cost?
Gains from trade are commonly described as resulting from: specialization in production from division of labor, economies of scale, scope, and agglomeration and relative availability of factor resources in types of output by farms, businesses, location and economies. a resulting increase in total output possibilities.
What are the advantages and disadvantages of comparative advantage?
A country has a comparative advantage if it can produce a good at a lower opportunity cost than another country. A lower opportunity cost means it has to forego less of other goods in order to produce it….The theory of comparative advantage.
| Textiles | Books | |
|---|---|---|
| TOTAL | 4 | 8 |
What are types of comparative advantage?
There are two types of cost advantage – absolute, and comparative. Absolute advantage means being more productive or cost-efficient than another country whereas comparative advantage relates to how much productive or cost efficient one country is than another.
How is opportunity cost of comparative advantage calculated?
Calculating Comparative Advantage
- Hence, 1 iron ore = 1.25 cars. Australia’s opportunity cost of 1 unit of iron ore.
- Hence, 1 iron ore = 0.71 cars. We now need to calculate the opportunity cost of 1 unit of cars from each country.
- Hence, 1 car – 0.8 iron ore. Australia’s opportunity cost of 1 unit of cars.