Question

What makes comparative advantage so important to productive choices in an economy? Please answer in at least 400 words

Answer 1

What makes comparative advantage so important to productive choices in an economy?

Answer:

• The gains from specialization and trade are based not on absolute advantage but on comparative change.
• When each person specializes in producing the good for which he/she has a comparative advantage, total production in the economy rises.
• As a result, the size of the economic pie increases which can be used to make everyone better off.
• Trade can benefit everyone in the society because it allows people to specialize in activities in which they have a comparative advantage.
• The principle of comparative advantage explains interdependence and the gains from trade in respect to the world of globalization and interdependence.
• Comparative advantage is a way to compare the ability of two people/country in producing good. The person who has the smaller opportunity cost of producing the good is said to have a comparative advantage.
• The principle of comparative advantage applies to countries as well as people. Economists use the principle of comparative advantage to advocate free trade among countries.