What is an example of a comparative advantage?
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Emily Lee
Studied at University of California, Berkeley, Lives in Berkeley, CA
Hi there! I'm Dr. Smith, an economist specializing in international trade. I've dedicated my career to understanding the complexities of the global market, and I'm happy to explain the concept of comparative advantage with a comprehensive example.
## Comparative Advantage: A Deep Dive
Let's imagine two countries, Atlantis, known for its skilled artisans, and Terra, known for its vast fertile lands. Both nations produce only two goods: handcrafted jewelry and wheat.
Here's a breakdown of their production capabilities:
Atlantis:
* Can produce 10 units of jewelry per day OR
* Can produce 20 units of wheat per day
Terra:
* Can produce 5 units of jewelry per day OR
* Can produce 25 units of wheat per day
Looking at these figures, it's clear that Atlantis has an absolute advantage in producing both jewelry and wheat. This means Atlantis can produce more of both goods using the same amount of resources compared to Terra.
**However, absolute advantage doesn't tell the whole story.** This is where comparative advantage comes in. To understand it, we need to look at the opportunity cost of producing each good.
Opportunity cost represents the potential benefits a country gives up when choosing one alternative over another. In simpler terms, it's what you have to forgo to produce something else.
Let's calculate the opportunity costs:
Atlantis:
* To produce 1 unit of jewelry, Atlantis gives up producing 2 units of wheat (20 units of wheat / 10 units of jewelry = 2).
* To produce 1 unit of wheat, Atlantis gives up producing 0.5 units of jewelry (10 units of jewelry / 20 units of wheat = 0.5).
Terra:
* To produce 1 unit of jewelry, Terra gives up producing 5 units of wheat (25 units of wheat / 5 units of jewelry = 5).
* To produce 1 unit of wheat, Terra gives up producing 0.2 units of jewelry (5 units of jewelry / 25 units of wheat = 0.2).
Now we can identify the comparative advantage:
* **Atlantis has a comparative advantage in jewelry production.** Atlantis gives up only 2 units of wheat to produce 1 unit of jewelry, while Terra gives up 5 units of wheat for the same output. Atlantis has a lower opportunity cost in jewelry production.
* **Terra has a comparative advantage in wheat production.** Terra sacrifices only 0.2 units of jewelry to produce 1 unit of wheat, whereas Atlantis sacrifices 0.5 units of jewelry for the same output. Terra has a lower opportunity cost in wheat production.
**The Benefits of Specialization and Trade:**
If both countries specialize in producing the good in which they have a comparative advantage, here's what happens:
1. Increased Total Output: Atlantis focuses its resources on crafting beautiful jewelry, while Terra cultivates its abundant land for wheat production. This specialization leads to higher production levels for both goods compared to a scenario where they try to produce both independently.
2. Mutually Beneficial Trade: Atlantis can now trade its surplus jewelry with Terra in exchange for wheat, and vice versa. Since each country obtains the goods at a lower opportunity cost than producing them domestically, both benefit from this exchange. This trade fosters economic growth and prosperity for both nations.
In Conclusion:
Comparative advantage illustrates that even if one country holds absolute advantage in producing all goods, specializing and trading with another country can still be mutually beneficial. This concept underscores the importance of free trade and international cooperation in maximizing global economic output and raising living standards worldwide.
## Comparative Advantage: A Deep Dive
Let's imagine two countries, Atlantis, known for its skilled artisans, and Terra, known for its vast fertile lands. Both nations produce only two goods: handcrafted jewelry and wheat.
Here's a breakdown of their production capabilities:
Atlantis:
* Can produce 10 units of jewelry per day OR
* Can produce 20 units of wheat per day
Terra:
* Can produce 5 units of jewelry per day OR
* Can produce 25 units of wheat per day
Looking at these figures, it's clear that Atlantis has an absolute advantage in producing both jewelry and wheat. This means Atlantis can produce more of both goods using the same amount of resources compared to Terra.
**However, absolute advantage doesn't tell the whole story.** This is where comparative advantage comes in. To understand it, we need to look at the opportunity cost of producing each good.
Opportunity cost represents the potential benefits a country gives up when choosing one alternative over another. In simpler terms, it's what you have to forgo to produce something else.
Let's calculate the opportunity costs:
Atlantis:
* To produce 1 unit of jewelry, Atlantis gives up producing 2 units of wheat (20 units of wheat / 10 units of jewelry = 2).
* To produce 1 unit of wheat, Atlantis gives up producing 0.5 units of jewelry (10 units of jewelry / 20 units of wheat = 0.5).
Terra:
* To produce 1 unit of jewelry, Terra gives up producing 5 units of wheat (25 units of wheat / 5 units of jewelry = 5).
* To produce 1 unit of wheat, Terra gives up producing 0.2 units of jewelry (5 units of jewelry / 25 units of wheat = 0.2).
Now we can identify the comparative advantage:
* **Atlantis has a comparative advantage in jewelry production.** Atlantis gives up only 2 units of wheat to produce 1 unit of jewelry, while Terra gives up 5 units of wheat for the same output. Atlantis has a lower opportunity cost in jewelry production.
* **Terra has a comparative advantage in wheat production.** Terra sacrifices only 0.2 units of jewelry to produce 1 unit of wheat, whereas Atlantis sacrifices 0.5 units of jewelry for the same output. Terra has a lower opportunity cost in wheat production.
**The Benefits of Specialization and Trade:**
If both countries specialize in producing the good in which they have a comparative advantage, here's what happens:
1. Increased Total Output: Atlantis focuses its resources on crafting beautiful jewelry, while Terra cultivates its abundant land for wheat production. This specialization leads to higher production levels for both goods compared to a scenario where they try to produce both independently.
2. Mutually Beneficial Trade: Atlantis can now trade its surplus jewelry with Terra in exchange for wheat, and vice versa. Since each country obtains the goods at a lower opportunity cost than producing them domestically, both benefit from this exchange. This trade fosters economic growth and prosperity for both nations.
In Conclusion:
Comparative advantage illustrates that even if one country holds absolute advantage in producing all goods, specializing and trading with another country can still be mutually beneficial. This concept underscores the importance of free trade and international cooperation in maximizing global economic output and raising living standards worldwide.
2024-05-31 10:31:02
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Studied at the University of Barcelona, Lives in Barcelona, Spain.
Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. ... For example, oil-producing nations have a comparative advantage in chemicals.
2023-04-15 14:17:52
Ethan Mitchell
QuesHub.com delivers expert answers and knowledge to you.
Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. ... For example, oil-producing nations have a comparative advantage in chemicals.
