📚 Learning Guide
Absolute and Comparative Advantage
hard

Which of the following statements accurately describe the implications of absolute and comparative advantage in international trade? Select all that apply.

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Choose the Best Answer

A

A country with an absolute advantage in producing wheat will always have a comparative advantage in wheat production.

B

Countries can benefit from trade even if one has an absolute advantage in all goods.

C

Comparative advantage is determined by opportunity cost, not just production efficiency.

D

Absolute advantage guarantees a country will export the good in which it excels.

E

Specialization based on comparative advantage can lead to increased overall production.

Understanding the Answer

Let's break down why this is correct

Answer

Absolute advantage means that a country can produce more of a good or service than another country using the same amount of resources. For example, if Country A can make 10 cars while Country B can only make 5 cars using the same resources, Country A has an absolute advantage in car production. On the other hand, comparative advantage focuses on the ability of a country to produce a good at a lower opportunity cost than another country. This means that even if one country is better at producing everything, trade can still be beneficial if each country specializes in what they produce best. For instance, if Country A is better at making cars and computers, while Country B is better at making only computers, both countries can benefit by trading cars for computers.

Detailed Explanation

None of the statements accurately describe the concepts of absolute and comparative advantage. Other options are incorrect because Some think that having an absolute advantage means a country is always better at producing that good; It's a common belief that if one country is better at everything, it won't benefit from trade.

Key Concepts

Absolute Advantage
Comparative Advantage
International Trade
Topic

Absolute and Comparative Advantage

Difficulty

hard level question

Cognitive Level

understand

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