Question

A World Trade Organization publication calls comparative advantage "arguably the single most powerful insight in economics." Source: World Trade Organization, "Understanding the WTO," www.wto.orglenglish/thewto_e/whatis_e/tif_e/fact3_e.htm The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as Referring to your answer above, what makes it such a powerful insight? A. t explains why larger firms and countries economically dominate smaller firms and countries. B. It is the basis for establishing an economic advantage over competing firms and countries C. It explains why if countries specialize and trade they will be better off D. It explains why if individuals, firms, and countries specialize and trade they will be better off

Answer 1

The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors is known as COMPARATIVE ADVANTAGE, what makes it such a powerful insight?

• D) It explains why if individuals, firms, and countries specialize and trade they will be better off

Step-by-step explanation:

The Heckscher Ohlin theory of comparative advantage states that a country must produce the goods for which they have an abundance of factors of production, e.g. countries with a lot of land can produce agricultural products. When a country is able to produce goods at a comparatively lower price than other countries, they will be able to trade and benefit from it.

Benefits from trade are obtained not by absolute advantages in the production of goods, but by producing goods with a comparative advantage, i.e. lower opportunity cost.

For example, country A can produce 100 bushels of corn and 50 bushels of wheat. Country B can produce 50 bushels of corn and 35 bushels of wheat.

• country A's opportunity cost of producing 1 bushel of corn = 50/100 = 0.5 bushels of wheat
• country A's opportunity cost of producing 1 bushel of wheat = 100/50 = 2 bushels of corn

• country B's opportunity cost of producing 1 bushel of corn = 35/50 = 0.7 bushels of wheat
• country B's opportunity cost of producing 1 bushel of wheat = 50/35 = 1.43 bushels of corn

Even though country A has an absolute advantage in the production of corn and wheat, it will benefit from trade only if it specializes in the production of corn and imports wheat. On the other hand, country B will benefit from trade if it specializes in the production of wheat and imports corn.