Question

The concept of "comparative advantage" refers to the A) ability of one region to produce a commodity at a lower opportunity cost than another region. O B) gains from international trade. O C) ability of one region to produce a commodity with less labour input than another region. O D) ability of one region to produce a commodity with fewer total inputs than another region.

Answer 1

1. The ability of one region to produce a commodity at a lower opportunity cost than another region. When countries specialise and trade in goods that have a lower opportunity cost, it is called comparative advantage.

2. The gains from trade. When two firms specialise and trade, it leads to increase in total output, productivity, efficient use of resources etc.

3. Decrease in the price level cause increases in private sector wealth which lead to increase in desired consumption. When aggregate price falls, consumers real income increases, purchasing power increases which leads to increase in aggregate demand.