How would you explain the idea of comparative advantage to a family or friend who does...

How would you explain the idea of comparative advantage to a family or friend who does not study business? Give a realworld example and explain why that country has a comparative advantage in that good.

Expert Solution

Comparative advantage is the simply the best you can do by giving up the least.

Suppose you are a good software engineer and babysitter than anyone in the neighborhood. Software engineering can help you earn $100 per hour. You are good at babysitting and can earn $20 per hour.

Now the opportunity cost of babysitting is $1000 foregone . The opportunity cost of doing software engineering work is $20 foregone as a babysitter.

You will choose that job which has less opportunity cost i.e. software engineering.

You have a comparative advantage in SOFTWARE ENGINEERING..

This concept of comparative advantage is applied to countries during trade.

Oil producing countries like Saudi Arabia, Kuwait have a comparative advantage in producing chemicals as they have a rich source of oil. They can produce chemicals at a lower opportunity cost than any other country.

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For doubts comment below.

Rahul Sunny answered 1 year ago

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