The Mother of Economy Practice Test

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Comparative advantage is defined as what?

The ability to produce more of a good or service with a given amount of time and resources.

A reduction in the value of a currency that is set under a fixed exchange rate regime.

The advantage when the opportunity cost of producing the good or service is lower for another product.

Comparative advantage is about producing goods at the lowest opportunity cost relative to another producer. In other words, a country should specialize in the good for which it sacrifices the least of the other good to produce it. This is why trade can make both sides better off: each country focuses on what it gives up less of, and then they exchange, increasing total output.

The correct idea captures that the advantage comes from lower opportunity costs for one product compared with the other product. The other statements describe different concepts—absolute productivity, currency value under fixed exchange rates, and trade barriers—which are not what comparative advantage defines.

A government-imposed restraint on the flow of international goods or services.