1. the U.S. has an absolute advantage in producing toys, but China has a comparative advantage in producing toys. Fortunately, however, the miracle of comparative advantage is one of the most incredible ideas ever summoned forth. Then, the good that is specialized in can be traded for the other good. Tutorial on Comparative Advantage. Comparative advantage is a key principle in international trade and forms the basis of why free trade is beneficial to countries. Definition: The RCA index is defined as the ratio of two shares. Shortly after you learn about opportunity costs and PPFs, you will need to learn about gains from trade and comparative advantage. … A comparative advantage indicates an area where specialization should occur in order to increase total production. Assume that the comparative-cost ratios of two products—baby formula and tuna fish—are as follows in the nations of Canswicki and Tunata: Canswicki: 1 can baby formula = 5 … Comparative advantage is the economic reality describing the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. When it comes to calculating opportunity cost there are 2 methods; depending on whether you are looking at outputs (with fixed inputs) or inputs (with fixed outputs). Nations that are blessed with an abundance of farmland, fresh water, and oil reserves have an absolute advantage in … The idea to determine a country’s 'strong' sectors by analyzing the actual export flows was pioneered by Liesner (1958). If it weren't for small miracles the world would be a very boring place indeed and economics would be considerably more "dismal" than it is. Revealed Comparative Advantage Index. The trick to figuring out who has the comparative advantage in which good is to be able to calculate opportunity costs quickly and reliably. Measures of revealed comparative advantage (RCA) have been used to help assess a country’s export potential. Revealed comparative advantage indices (RCA) use the trade pattern to identify the sectors in which an economy has a comparative advantage, by comparing the country of interests’ trade profile with the world average. in practice we measure comparative advantage indirectly. It is a more dynamic, strategic concept. Balassa Index (or Revealed Comparative Advantage, RCA): 2001-2008. By Dan Jacoby. Comparative Advantage: is the ability of one entity to produce a good or service at a lower opportunity cost than another entity. The typical approach to computing RCA (Revealed Comparative Advantage) is the Balassa definition: ... 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