In a two-good, two-country world, a country has a comparative advantage in any good for which it has a:

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In this question, we’re asked about the condition under which a country has a comparative advantage in a two-good, two-country setting. We’ll evaluate each option in turn.

Option a: 'a. higher absolute cost than the other country' If a country has a higher absolute cost in producing a good, that means it is less efficient in that good in absolute terms. Comparative advantage, however, is not about absolute costs but about relative costs (opportunity costs). Therefore, this statement misidentifies the key concept and is not a correct criterion for comparative advantage.

Option b: 'b. lower absolute cost than the other country' While lower absolute cost indicates greater efficiency in production, comparative advantage does not rely on absolute cost alone. A country could have a lower absolute cost in one good but a higher opportunity cost in that good relative to the other country, which would affect comparative advantage. Thus, this option is not the right criterion by itself.

Option c: 'c. lower opportunity cost than the other country' This option captures the essence of comparative advantage: a country has it in a good if its opportunity cost of producing that good is lower than that of the other country. Opportunity cost reflects the value of the next best alternative foregone, and the country with the lower opportunity cost for a good should specialize in that good. This aligns with the standard definition used in international trade theory.

Option d: 'd. higher opportunity cost than the other country' If a country has a higher opportunity cost for producing a good, it forgoes more of the alternative that could be produced with the same resources, implying it would have a comparative disadvantage in that good. Therefore, this option describes the opposite of comparative advantage and is incorrect.

To summarize the reasoning across all choices, we focus on opportunity costs rather than absolute costs. Absolute costs tell us about efficiency in isolation, but comparative advantage depends on the relative trade-offs between goods across countries. By comparing which country sacrifices less of the alternative when producing a given good, we identify the true source of comparative advantage.

This analysis reinforces that the correct criterion for comparative advantage is based on relative (opportunity) costs, not merely absolute costs, and is determined by which country has the lower opportunity cost for each good. The other options fail because they either emphasize absolute cost (a and b) or posit the opposite condition (d) and thus do not align with the comparative-advantage concept.

Dashboard Term 2 Assessable Quiz 3 - International Trade & Exchange Rates

In a two-good, two-country world, a country has a comparative advantage in any good for which it has a:

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