Question

1. Discuss the concept of comparative advantage. Explain and give an example. 2. Identify the factors that affect demand. Come up with your own example to illustrate how these factors shift demand (do not use examples from the textbook).

Answer 1

Answer to the first question has been given :

1) Comparative Advantage : This theory was first developed by English economist David Ricardo in 1817 . It is the ability of a country to produce a good or a service at a lower opportunity cost when compared to other countries producing the same product .

Comparative advantage is the basis for all trade . Let us illustrate further with the help of an example .

Suppose India produces 2 units of cloth or 1 unit of food with certain level of resources ( time , labor , technology etc ).

USA produces 3 units of cloth or 2 unit of food with exactly same level of resources .

So in cloth production , India's opportunity cost = 1/2 food = 0.5 food

USA's opportunity cost = 2/3 food = 0.67 food

Hence USA has a higher opportunity cost for producing cloth . So India has a comparative advantage in cloth production .

Similarly , we can find out that USA has a comparative advantage in food production .