Explain How the Gains from Comparative Advantage Are Realized

question 64

Essay

Explain how the gains from comparative advantage are realized.

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Definitions:

Profitability Index

A measure comparing the present value of future cash flows to the initial investment, used to assess the attractiveness of a project.

Present Value

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return, important in assessing the value of investments.

Initial Investment

refers to the initial amount of money invested in a project or venture to get it started.

Profitability Index

A financial tool that calculates the relationship between the costs and benefits of a project, where a value above 1 indicates a profitable project.