Tips and Tricks

What is the role of opportunity cost in comparative advantage theory?

What is the role of opportunity cost in comparative advantage theory?

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.

What is opportunity cost theory of international trade?

The opportunity cost theory explains that if a country can produce either commodity X or Y, the opportunity cost of commodity X is the amount of the other commodity Y that must be given up in order to get one additional unit of commodity X.

What is theory of comparative advantage with example?

Comparative advantage is what you do best while also giving up the least. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. That’s because you’ll make more money as a plumber.

What is opportunity cost in Ricardian theory of trade?

The opportunity cost of cloth production is defined as the amount of wine that must be given up in order to produce one more unit of cloth.

What is opportunity cost formula?

Opportunity cost is the benefit you forego in choosing one course of action over another. You can determine the opportunity cost of choosing one investment option over another by using the following formula: Opportunity Cost = Return on Most Profitable Investment Choice – Return on Investment Chosen to Pursue.

What is opportunity cost give example?

The opportunity cost is time spent studying and that money to spend on something else. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment). A commuter takes the train to work instead of driving.

What is the best definition of opportunity cost?

Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another.

How do you determine opportunity cost?

The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A—to invest in the stock market hoping to generate capital gain returns.

Which of the following explains the principle of opportunity cost?

Explanation: Opportunity cost is the best alternative sacrificed for a chosen alternative. Stated differently, it is the cost of not choosing the next-best alternative. This principle states that some highly valued opportunities must be forgone in all economic decisions.

Which is the best example of opportunity cost quizlet?

Which situation is the best example of opportunity cost? A country chooses to produce bananas instead of wheat. How does specialization enable countries to trade with one another? A country can make and sell goods affordably and buy goods that it is inefficient at making.

What is the difference between comparative advantage and opportunity cost?

• Comparative advantage is when a company can produce goods at a lower opportunity cost than its competitors. Opportunity cost is the cost that must be endured when selecting one option over the other. • Competitive advantage represents any benefits and advantages that a company may have over its competitors.

How do you calculate comparative advantage?

To calculate comparative advantage, you have to calculate the opportunity cost of each good or service. Step 1: Calculate the Opportunity Cost of Each Good from Each Country. Step 2: Plot the opportunity costs on the Two Way Table Step 3: Identify the Comparative Advantage

What are some disadvantages of comparative advantage?

Government may restrict trade. If a country removes itself from an international trade agreement or a government imposes tariffs,it could create complications for the companies that were relying on

  • Transport cost may outweigh the comparative advantage.
  • Increased specialization may make scaling difficult.
  • What gives a company a comparative advantage?

    What is ‘Comparative Advantage’. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book “ Principles of Political Economy