Question

Based on this analysis, Ricardo recommends that England concentrate on producing wool, which illustrates what economic concept? A. comparative advantage B. laissez-faire C. mercantilism D. supply and demand

Short answer

A. comparative advantage

Step-by-step solution

Understand the Concept

Read the problem statement carefully. Ricardo is recommending that England focus on producing wool. This implies that England has a specific advantage in producing wool compared to other products or other countries.

Recognize Relevant Economic Concepts

List out the provided economic concepts: comparative advantage, laissez-faire, mercantilism, and supply and demand. Reflect on what each concept means. Comparative advantage refers to the ability of a country to produce a good at a lower opportunity cost than another country. Laissez-faire is about minimal government interference in the economy. Mercantilism involves government regulation of the economy to achieve a favorable balance of trade. Supply and demand is the model describing the relationship between the availability of a good and the desire for that good.

Match the Concept to the Scenario

Identify which of these concepts best matches the scenario where Ricardo suggests that England should concentrate on producing wool. Since this recommendation is based on England's efficiency or lower opportunity cost in producing wool, it is best described by the concept of comparative advantage.

Key concepts

Economic Theory

Economic theory helps us understand how economies function and how different factors influence economic outcomes. It's a framework to explain phenomena like production, consumption, and distribution of goods and services. In this exercise, one crucial economic theory is comparative advantage. This theory explains why Ricardo would suggest that England should focus on producing wool. According to comparative advantage, countries thrive by producing goods with the lowest opportunity cost, thereby utilizing their resources more efficiently. By understanding these theories, we can better grasp the strategic decisions made by countries in their economic planning.

International Trade

International trade involves the exchange of goods and services between countries. This concept illustrates how countries benefit from trading with each other instead of being self-sufficient. Ricardo's recommendation that England focuses on producing wool ties directly to the principles of international trade.

Key elements of international trade include:

• Specialization: Countries should specialize in producing goods where they hold a comparative advantage.
• Trade Benefits: By trading, countries can obtain goods they don't produce efficiently.
• Economies of Scale: Focusing on specific goods allows countries to benefit from economies of scale, reducing costs and improving production efficiency.

In this case, international trade theories support England's strategic specialization in wool production, fostering economic efficiency and trade benefits.

Opportunity Cost

Opportunity cost is the potential benefit lost when choosing one alternative over another. It's a critical concept in economics for making informed decisions. When Ricardo recommends that England produce wool, he's considering the opportunity cost.

To illustrate this:

• England could produce other goods like wine, but if producing wool costs England less in terms of resources and available advantages, the opportunity cost of not producing wool becomes higher.
• The decision is then weighed against the benefits: producing wool versus the lost potential of producing another good.

Understanding opportunity cost helps countries and businesses decide where to allocate resources most effectively. Here, focusing on wool means England sacrifices less, gaining a clear economic benefit.

Production Efficiency

Production efficiency refers to producing goods at the lowest possible cost using available resources effectively. Countries achieve production efficiency by leveraging their strengths and comparative advantages, as Ricardo advises for England with wool production.

Production efficiency can be enhanced by:

• Utilizing advanced technology: Implementation of better machinery and techniques.
• Improving labor skills: Training and education to increase productivity.
• Better resource management: Ensuring resources are used optimally to avoid wastage.

In England's case, focusing on wool explains how they can use their unique factors—land, climate, or skilled labor—most efficiently, lowering production costs and increasing overall economic welfare.