Future Business Leader Achievments (FBLA) Economics Practice Exam

What distinguishes comparative advantage from absolute advantage?

1. Resource allocation efficiency

2. Cost of production and opportunity cost

3. Technological superiority

4. Market share dominance

The correct answer is: Cost of production and opportunity cost

The distinction between comparative advantage and absolute advantage lies primarily in the concepts of cost of production and opportunity cost. Comparative advantage refers to the ability of an entity—be it an individual, business, or country—to produce a good or service at a lower opportunity cost compared to others. This means that while one party may be more efficient in producing certain goods (such as having a lower cost of production), what truly matters in determining comparative advantage is the relative efficiency and sacrifices made in producing other goods instead. In contrast, absolute advantage is focused on the overall ability to produce more of a good or service regardless of the opportunity costs. It highlights the superiority in production capabilities without considering what is being sacrificed in terms of other goods. Understanding this distinction emphasizes the importance of opportunity cost in trade and production decisions. It shows that even if one party is better at producing all goods (absolute advantage), trade can still be beneficial if parties specialize based on their comparative advantages. This principle underpins many theories of international trade and economic efficiency.