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Question: Explain the theory of comparative advantage. 20/20

Answer: Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost relative to another country. This means a country can produce a good relatively cheaper than other countries and it gives a country or business the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins. Absolute advantage means that an economy can produce a good for lower costs than another and that less resources are needed to produce the same amount of goods.

The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost - then there will be an increase in economic welfare. This was developed by David Ricardo in his 1817 book. Comparative advantage explains how trade can create value for both parties even if one can produce all goods with fewer resources tha...(short extract)

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  • Subject: Economics
  • Course: Economics
  • Level: A-Level
  • Year: Not applicable
  • Mark: 100%
  • Words: 789
  • Date submitted: September 16, 2013
  • Date written: June, 2013
  • References: No
  • Document type: Essay*
  • Essay ID: 5044

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