Question

Comparative advantage is based on the economic concept of:

Answer 1

Answer:

B. Opportunity Cost

Explanation:

Comparative Advantage is when an economy can produce certain goods & services at a lower opportunity cost than other trading economies.

Opportunity cost is the cost of next best option forgone while choosing a particular option.

Comparative advantage (production ability at lower opportunity cost) implies: Economy can produce a good/ service by sacrifising lesser amount of other good, than the other economy.

Example : Production Possibilities of 2 countries, 2 goods :-

                   Good X       Good Y     Opportunity Cost (Goods Ratio)

Country A     10                30               1:3    (10/30)

Country B      5                 10                1:2   (5/10)

Country A can produce Good Y by sacrifising 3 units of Good X, Country B can produce Good Y by sacrifising 2 units of Good X. So, B can produce good Y at lesser opportunity cost than A. Hence, country B has comparative advantage in good Y.