Future Business Leader Achievments (FBLA) Economics Practice Exam

A country that has a comparative advantage in the production of a good?

1. Has a higher capital/output ratio in the production of the good than its trading partners.

2. Has a lower opportunity cost of producing that good than its trading partners.

3. Has a greater labor force participation rate in the production of that good than its trading partners.

4. Will have a greater standard of living than its trading partners.

The correct answer is: Has a lower opportunity cost of producing that good than its trading partners.

A country with a comparative advantage in the production of a good is defined by its ability to produce that good at a lower opportunity cost compared to its trading partners. Opportunity cost refers to what is foregone when a choice is made; in this context, it is the value of the next best alternative that must be sacrificed in order to produce the good. When a country has a lower opportunity cost, it means that it is sacrificing less (in terms of other goods that could have been produced) to produce the good in question. This enables the country to specialize in the production of that good, leading to more efficient use of resources. As countries trade based on their comparative advantages, they can benefit from specialization, trading the goods they produce efficiently for those produced by others at a lower opportunity cost. Thus, this leads to gains from trade. The other options focus on various factors that do not align with the core concept of comparative advantage. For example, having a higher capital/output ratio, greater labor force participation, or a greater standard of living are not direct indicators of comparative advantage; rather, they might reflect a country's overall productivity, structural characteristics, or economic welfare. Hence, the correct answer highlights the essential economic principle of opportunity cost that underpins the concept