Using the arguments provided by Russell Roberts about specialization and the gains from trade, craft an economic argument that links the economic principle of comparative advantage to John Kay’s notion of distinctive capabilities in business. Explain—in the same spirit as the emergence of Ricardian rent—why the competent application of distinctive capabilities to appropriate markets will allow firms to create added value (as John Kay defines and explains the term). Make sure your exposition properly applies the concept of opportunity cost.
-Why can we think about the concepts of comparative advantage and opportunity cost as two sides of the same coin?
-How would Roberts answer the above question in the context of direct activity, roundabout activity, and the type of specialization he highlights in his story?
-How do Roberts’ ideas generalize to John Kay’s ideas when Kay talks about distinctive capabilities? Why is Kay effectively describing the idea of comparative advantage in practical business terms? How does this idea connect to the idea of specialization and trade (or, more generally, market exchange)?
-Recall Fisher’s concept of capital (= wealth). Why does the phenomena of specialization, based on comparative advantage/distinctive capabilities, create wealth?
-What is Ricardian rent and how does it relate to comparative advantage?
-What is added value (economic profit) and how does it relate to distinctive capability?
-How do Ricardian rent and Added Value relate to wealth creation? How does opportunity cost factor into your answer?
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