Country X can produce corn and sugar at a lower cost than other countries. However, the world market for corn is stronger than for sugar. Therefore, Country X chooses to specialize in producing corn and to buy sugar from other countries. This example illustrates the concept of _____ .

Question

a. balance of payments
b. balance of trade
c. comparative advantage
d. absolute advantage

Answer 1

This example illustrates the concept of c. comparative advantage. Country X specializes in producing corn because it can do so at a lower opportunity cost compared to other countries, while it chooses to import sugar, which it produces at a higher opportunity cost.