How does opportunity cost impact comparative advantage and specialization?

How does opportunity cost impact comparative advantage and specialization?

Whenever a country has a comparative advantage in production it can benefit from specialization and trade. Consumer benefits: Specialization means that the opportunity cost of production is lower, which means that globally more goods are produced and prices are lower.

What determines comparative advantage?

In order to determine if comparative advantages exist between the two countries, you have to figure out the opportunity cost of making one unit of one of the items. Their opportunity costs are lower for each of these products relative to one another, and so there is potential for beneficial trade.

How do you calculate comparative advantage in economics?

To calculate comparative advantage, find the opportunity cost of producing one barrel of oil in both countries. The country with the lowest opportunity cost has the comparative advantage. With the same labor time, Canada can produce either 20 barrels of oil or 40 tons of lumber.

How do you determine who has the comparative advantage in producing one good?

To calculate comparative advantage, find the opportunity cost of producing one barrel of oil in both countries. The country with the lowest opportunity cost has the comparative advantage.

How is opportunity cost calculated?

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.

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.

How do you find opportunity cost in terms of trade?

Terms of trade are determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries. Acceptable terms of trade for this situation would be: 1 coal = 3 units of steel.

What is the difference between comparative and absolute advantage?

Absolute advantage refers to the ability to produce more or better goods and services than somebody else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality.