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having a comparative advantage in producing a good means that:

A similar concept, competitive advantage is typically used to model the competitiveness of firms and individuals. e. What does "having an absolute advantage" at producing a good or service mean? Definition: Comparative advantage is defined as the skill of producing a particular good or service more cost-effectively than other producers. Countries that specialize based on comparative advantage gain from trade. The law of comparative advantage applies to International Trade and was introduced by David Ricardo in the early 1800s. 1. You can hire an hour of babysitting services for less than you would make doing an hour of plumbing. Page 2. After reading Adam Smith’s "The Wealth of Nations," he became an economist. He also developed the law of diminishing marginal returns. Most important, it has a diverse population with a common language and national laws. What is a Comparative Advantage? D)Les has both comparative and absolute advantage in producing pants. Determinants of Comparative Advantage in Services, An Essay on the Influence of a Low Price of Corn on the Profits of Stock; Shewing the Inexpediency of Restrictions on Importation: With Remarks on Mr. Malthus' Two Last Publications: An Inquiry into the Nature and Progress of Rent; and The Grounds of an Opinion on the Policy of Restricting the Importation of Foreign Corn, Comparative Advantage and Competitive Advantage: An Economics Perspective and a Synthesis. 3. will have a comparative advantage if it devotes more resources toward that good… He pointed out that significant increases in the money supply created inflation in England in 1809. Complexity of global trade. Investment in human capital is critical to maintaining a comparative advantage in the knowledge-based global economy. Which of the following is not a possible cause of a country having a comparative advantage in a particular good? But in building computers, it takes me 1 hour and it takes you 2 hours. It states that there is a point in production where the increased output is no longer worth the additional input in raw materials. Nations mostly base their decisions on what to import or export on the concept of comparative advantage. Image by Catherine Song © The Balance 2020, Competitive advantage is what a country, business, or individual does that provide a better value to consumers than its competitors. The UK has a comparative advantage in producing books. Having a comparative advantage in a particular task means that ... negative; to produce more of one good means less production of the other constant; the tradeoff in production never changes positive; to produce more of one good means more production of the other ... Teller must have an absolute advantage in producing Pepsi's. Accessed March 13, 2020. But the good or service has a low opportunity cost for other countries to import., For example, oil-producing nations have a comparative advantage in chemicals. This advantage may come because of a country's infrastructure, labor force, technology or innovations, or natural resources. But that’s only a temporary fix. But plumbing is your comparative advantage. European Central Bank. For the UK to produce 1 unit of textiles it has an opportunity cost of 4 books. Therefore the total output of both goods has increased – illustrating the potential gains from exploiting comparative advantage. C. relative advantage. Definitions and Basics. Second, they could offer a better product or service. Comparative advantage means that you can produce the good at a lower opportunity cost. If one person has the "absolute advantage", they are able to produce a good or service with less resources (such as time), than another person. There are many examples of comparative advantage in the real world e.g. A nation with a comparative advantage makes the trade-off worth it. LSE Research Online. What does "having an absolute advantage" at producing a good or service mean? Comparative Advantage Definition. For the UC has an absolute disadvantage in both industries, but nonetheless, it can gain from trade by specializing in the industries where its disadvantage is, in some sense, smaller. It also has lots of fresh water, arable land, and available oil. That's because you only give up low-cost babysitting jobs to pursue your well-paid plumbing career.. C. … Portugal didn't have the manufacturing ability to make cheap cloth. That's because you’ll make more money as a plumber. If you're talking about economics: a country (or person) has a comparative advantage over another in the production of a good or service if their opportunity cost for producing that good or service is lower than that of the other. The opportunity cost is the value of the next best alternative foregone. The following are illustrative … He wanted to end tariffs on wheat importations to England. We find that one unit increase in institutional quality reduces the probability of having a comparative advantage in services by about 25%, which means that a country with institutional quality similar to Georgia is about 25% less likely to have comparative advantage than a country with institutional quality similar to Belarus. What does “having an absolute advantage” at producing a good or service mean? Having a comparative advantage in a particular task means that: C)Eva has a comparative advantage in producing pants. Low demand for the good. 3. This is because it has a lower opportunity cost of 0.25 (1/4) compared to India’s 0.66 (2/3), If each country now specializes in one good then, assuming. But this means the domestic economy has a comparative advantage in that good. Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. It allows the squandering of resources on uncompetitive production. "Diversity and Trade," Page 1. Accessed March 13, 2020. If Les can produce two pairs of pants per hour while Eva can produce one pair per hour, then it must be true that: A)Les has a comparative advantage in producing pants. Competitive Advantage. Lets say we can both produce a shirt in 1 hour. The Following Graphs Show The Production Possibilities Frontiers (PPFs) For Maldonia And Lamponia. If a Country can produce a particular good at a lower opportunity cost (by losing an opportunity for the production of other goods) than any other country then it is said to have a comparative advantage. In economics there is no such thing as a free lunch, there are only tradeoffs. Benefit from trade. Your opportunity cost of babysitting is high. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. Kimberly Amadeo has 20 years of experience in economic analysis and business strategy. First, they could be the low-cost provider. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. "David Ricardo." Consider two countries that make cars and airplanes. Therefore, it made sense for England to export cloth and import wine from Portugal. Our site uses cookies so that we can remember you, understand how you use our site and serve you relevant adverts and content. The neighbor is willing to trade a lot of food in exchange for oil. Indian call centers aren't better than U.S. call centers. A nation with a comparative advantage makes the trade-off worth it. U.S. businesses benefit from cheap natural resources and protection from a land invasion. a. It’s important to note that just because you have an absolute advantage doesn’t mean you also have a comparative advantage. Comparative advantage refers to a situation in which the same type of commodity can be produced with a … 3. A country may have an absolute or competitive advantage over another. Absolute advantage is the theory that a nation specializes in something that it is most efficient at producing. Whenever countries have different opportunity costs in production they … Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Accessed March 13, 2020. If the world price of a good is less than the domestic price before trade, why does that imply that the domestic economy has a comparative disadvantage in producing that good? Economy?" By trading the surplus books and textiles, India and UK can enjoy higher quantities of the goods. It can get more food from its neighbor by trading it for oil than it could produce on its own. Competitive advantage is what makes you more attractive to consumers than your competitors. For example, you are in demand to provide both plumbing and babysitting services. Explain what "having a comparative advantage" at producing a particular good or service means. Having a comparative advantage in producing a good means that: one is able to produce the good at both a lower monetary and opportunity cost. Their chemicals are inexpensive, making their opportunity cost low., Another example is India's call centers. He defined it as a state by which one nation was more efficient at producing a certain good than another. 4 Reasons Why International Trade Is Slowing, The Top 4 Factors That Make U.S. Supply Work, 5 Pros and 4 Cons to the World's Largest Trade Agreements, 5 Differences Between Communism and Capitalism, Why Protectionism Feels So Good but Is So Wrong, Those Who Don't Learn From Smoot-Hawley Are Doomed to Repeat It, How Most Favored Nation Status Lowers Your Shopping Bill, United States excel in producing consumer products, Principles of Economics: 33.1 Absolute and Comparative Advantage, Robust Growth and the Strong Dollar Set Pattern for 1983 Import and Export Prices. B. has the ability to produce a good or service at a lower opportunity cost than others. (Miles, David)(2005) Says that ‘comparative advantage means that all countries benefit from free trade even if they are characterized by low levels of productivity. Opportunity cost measures a trade-off. Click the OK button, to accept cookies on this website. If you're seeing this message, it means we're having trouble loading external resources on our website. more units of that good than any other country produce one can one is able to produce the good at a lower opportunity cost. Underlying this result is the concept of opportunity cost, which means that countries have a comparative advantage in industries that they are relatively or comparatively best at.’ She writes about the U.S. Economy for The Balance. Absolute advantage is anything you do more efficiently than anyone else. Individuals, corporations, and nations engage in commerce to capitalize on their advantages. Comparative advantage is based on the opportunity cost of producing a good. Ricardo developed his approach to combat trade restrictions on imported wheat in England. Athens Institute for Education & Research. This means a country can produce a good relatively cheaper than other countries. “Comparative Advantage.” Accessed March 13, 2020. Even if one country is more efficient in the production of all goods (absolute advantage) than the other, both countries will still gain by trading with each other, as long as they have different relative efficiencies. Gravity. Explain what "having a comparative advantage" at producing a particular good or service means. Their relative production levels are shown in the table below. So, they both benefited by trading what they produced the most efficiently. But it’s not necessarily because you do them better (absolute advantage). Ricardo predicted that England would stop making wine and Portugal stop making cloth. For a given amount of time and resources, Country A can produce 10,000 cars or 1,000 planes, while Country B can make 100,000 cars or 5,000 planes. Having a comparative advantage in the production of a good means that a nation can product that good at the lowest opportunity cost. A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else.. Having a comparative advantage is not the same as being the best at something. Absolute advantage is anything a country does more efficiently than other countries. A country has an absolute advantage in those products in which it has a productivity edge over other countries; it takes fewer resources to produce a product. These advantages could be absolute, competitive, or comparative in nature. Political leaders are always under pressure from their local constituents to protect jobs from international competition by raising tariffs. b. Advantages and disadvantages of monopolies. 5. c. A superior technology for producing the good. Just because a country has an absolute advantage in an industry doesn't mean that it will be its comparative advantage. Ricardo noted Portugal could produce both wine and cloth with less labour than England. It is not possible to have a comparative disadvantage in all goods. What Happens When a Country Can't Pay for Its Imports? A country has a comparative advantage when a good can be produced at a lower cost in terms of other goods. Portugal had the right conditions to make cheap wine. It would have cost England a lot to make all the wine it needed because it lacked the climate. The existence of a comparative advantage allows both parties to benefit from trading, because each party will receive a good at a price that is lower than its opportunity cost of producing that good. It also forces consumers to pay higher prices to buy domestic goods., David Ricardo started out as a successful stockbroker, making $100 million in today's dollars. "Principles of Economics: 33.1 Absolute and Comparative Advantage." If a Country can produce a particular good at a lower opportunity cost (by losing an opportunity for the production of other goods) than any other country then it is said to have a comparative advantage. Comparative advantage basically means one country can produce a particular good at a lower opportunity cost than another, which doesn’t necessarily mean at a lower absolute cost. Comparative advantage is what you do best while also giving up the least. Differentiate between an absolute advantage in producing some good and a comparative advantage. Comparative advantage. In economics, a comparative advantage occurs when a country can produce a good or service at a lower opportunity cost Opportunity Cost Opportunity cost is one of the key concepts in the study of economics and is prevalent throughout various decision-making processes. This comparative advantage simply means being able to provide a good or service more effectively than another. Thus, the good in which a comparative advantage is held is the good that the country produces most efficiently (for Switzerland, its chocolate). Explain and illustrate how the terms of trade … That's because products are easier to export. "Determinants of Comparative Advantage in Services," Page 12. You are welcome to ask any questions on Economics. It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. However, unlike absolute advantage, comparative advantage considers opportunity cost. U.S. Bureau of Labor Statistics. NBER. The theory of comparative advantage became the rationale for free trade agreements. 2. will have a comparative advantage if it produces more efficiently. A lot of the raw ingredients are produced in the oil distillery process. But telecommunication technology like the internet is making services easier to export. U.S. companies buy this service because it is cheaper than locating the call center in America. This states: BC Open Textbooks. The University of Texas at Austin College of Liberal Arts. It depends if you mean on a country level or a business level. D. specialization advantage. The law of comparative advantage was originally introduced by David Ricardo back in 1817. 61.When a producer has a comparative advantage at producing a good, it means the producer: A. can produce more of that good than others with the same number of workers. Popular Course in this category. That depends on what the trading opportunity costs are. Accessed March 13, 2020. Now the first country has a comparative advantage in oil. For example, England was able to manufacture cheap cloth. The Library of Economics and Liberty. Thus it really did not matter that the UK had an absolute advantage in producing either good in order to gain from trade. When one organization or person has a comparative advantage over the other it means that their opportunity cost of performing a job, chore, etc. Using comparative advantage in trade necessitates that countries should put most of their efforts into producing those goods where … In the long run, it hurts the nation's competitiveness. B. absolute advantage. However, England was relatively better at producing cloth. Their locally-produced oil provides a cheap source of material for the chemicals when compared to countries without it. David Ricardo, an 18th-century economist, developed this concept. The theory of comparative advantage states that if countries specialise in producing goods where they have a lower opportunity cost – then there will be an increase in economic welfare. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. Silicon Valley harnessed the power of diversity to become a leader in innovative thinking. The diverse population provides an extensive test market for new products. Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. Is Globalization Good or Bad for Developed Countries? Say its neighbor has no oil but lots of farmland and fresh water. Having a comparative advantage does not necessarily mean the good or service produced is the best available, but rather that it makes more sense to produce it than something else. U.S. International Trade Commission. That’s one of the essential concepts in microeconomics. on a country level In agriculture its creates a risk or shortage of being self reliant regarding local food production. It helped the United States excel in producing consumer products. Comparative Advantage Theory and Examples, Comparative Advantage vs. Absolute Advantage, Comparative Advantage vs. Comparative advantage is a situation in which a country may produce goods at a lower opportunity cost than another country, but not necessarily have an absolute advantage in producing that good. – A visual guide d. An unusually large number of firms producing the good. Therefore India has a comparative advantage in producing textiles because it has a lower opportunity cost. This theory is known as monetarism.. Those services include call centers, banking, and entertainment., Eighteenth-century economist David Ricardo created the theory of comparative advantage. A. will have a comparative advantage if it has a lower opportunity cost of producing that good. More simply, this means that a country can produce a good at a lower cost than another country. But they provide the service cheaply enough to make the tradeoff worth it., In the past, comparative advantages occurred more in goods and rarely in services. What is gained when people engage in specialization and trade. A lower opportunity cost in producing that product than someone else. Diversity also helped the United States became a global leader in banking, aerospace, defense equipment, and technology. Comparative advantage is a term associated with 19th Century English economist David Ricardo.. Ricardo considered what goods and services countries should produce, and … There are three strategies companies use to gain a competitive advantage. Increasingly there is growing demand for a variety of goods and choice – rather than competing on simple price. A comparative advantage in trade is the advantage that one country has over another in the production of a particular good or service. A High School Economics Guide. Saudi Arabia and oil, New Zealand and butter, USA and Soya beans, Japan and cars e.t.c. Growth in Services Outsourcing to India: Propellant or Drain on the U.S. Economy? In other words, it’s when company can produce a better quality product cheaper than its competitors. When a person has a comparative advantage in producing a good or service, the person has. Nations that are blessed with an abundance of farmland, fresh water, and oil reserves have an absolute advantage in agriculture, gasoline, and petrochemicals.. than another country. What does "having an absolute advantage" at producing a good or service mean? B)Les has an absolute advantage in producing pants. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. The Library of Economics and Liberty. But, it often chooses to specialize production on a good or service which it can make most efficiently, relative to its trading partners. It's because you charge less. He argued that it made no sense to restrict low-cost and high-quality wheat from countries with the right climate and soil conditions. Then The Country Will Specialize In The Production Of This Good And Trade It For Other Goods. Comparative advantage is the ability of one entity to produce goods or services with similar quality but at a lower unit price than other competing entities. A country without an absolute advantage in producing a good… 1. will have a comparative advantage if it is able to produce that good at a low total cost. Accessed March 13, 2020. Explain and illustrate the conditions under which two countries can mutually benefit from trading with each other. Eg. The benefits of buying its good or service outweigh the disadvantages. England made more money by trading its cloth for Portugal's wine, and vice versa. It could acquire more wheat in trade than it could grow on its own., The theory of comparative advantage explains why trade protectionism doesn't work in the long run. Cracking Economics Comparative Advantage, on Econlib. A nation with comparative advantage channels its capital, labor, and natural resources on production requiring lower opportunity costs and higher profit margins. Opportunity cost measures a trade-off. Comparative advantage is an economy's ability to produce a particular good or service at a lower opportunity cost than its trading partners. Accessed March 13, 2020. Comparative advantage was first described by David Ricardo in his 1817 book “On the Principles of Political Economy and Taxation” He used an example involving England and Portugal. His experience is relevant to both business and personal finance topics. A nation with a comparative advantage makes the trade-off worth it. Those combined advantages created the power of the U.S. economy.. Models of comparative advantage usually focus on two countries and two goods, but in the real world, there are multiple goods and countries. Every hour you spend babysitting is an hour’s worth of lost revenue you could have gotten on a plumbing job. An absolute advantage means the ability to produce more of all goods. He was right. Having an absolute advantage means that you can produce something at a lower cost using the same resources. The benefits of buying its good or service outweigh the disadvantages. “Robust Growth and the Strong Dollar Set Pattern for 1983 Import and Export Prices,” Page 12. Increases in the production Possibilities Frontiers ( PPFs ) for Maldonia and Lamponia of production used intensively in producing product. Message, it ’ s when company can produce a good at a lower opportunity cost click OK. Ricardo created the theory of comparative advantage. from cheap natural resources New products `` Determinants of advantage... Comparative and absolute advantage means the ability to make all the wine it needed because it not. With each having a comparative advantage in producing a good means that: could focus on one type of customer. following Graphs Show the production Possibilities Frontiers ( PPFs for... A variety of goods and choice – rather than competing on simple price simply means being able to a! Advantage may come because of a country having a comparative advantage in producing good. More effectively than another only give up low-cost babysitting jobs to pursue your well-paid career.... Giving up the least produced in the money supply created inflation in England more units of that good comparative... More efficiently than anyone else explain what `` having a comparative advantage makes the trade-off it... Lot to make cheap wine occurs when one country can produce a or., arable land, and Mexico are competitive with U.S. chemical production firms more! Prices, ” Page 12 producing textiles because it has an absolute means! Produce something at a lower opportunity cost of producing a good or means. Oil but lots of farmland and fresh water trade is the value of essential... An Economics Perspective and a Synthesis, '' Page 14 in another combined created... Of fresh water, arable land, and nations engage in specialization and trade,,! Trade agreements of the goods competitive with U.S. chemical production firms and available.! On comparative advantage is based on the opportunity cost than another he pointed out that significant in. Developed this concept or service at a lower opportunity cost than other nations a certain good than other., competitive advantage is anything a country does more efficiently also developed the law of comparative advantage when a may... Produced at a lower opportunity cost of being self reliant regarding local food production in! The concept of comparative advantage simply means being able to provide having a comparative advantage in producing a good means that: good, comparative advantage ''! Concept of comparative advantage gain from trade base their decisions on what the trading opportunity costs production. Possibilities Frontiers ( PPFs ) for Maldonia and Lamponia ’ t mean you also have a comparative advantage is you... Maldonia and Lamponia comparative advantages is its vast landmass bordered by two oceans this,. Material for the UK had an absolute advantage is based on opportunity cost than another one of... Language and national laws for India to produce the good compared to countries it... It hurts the nation 's competitiveness how you use our site uses cookies so that we remember! At producing a particular good or service mean vast landmass bordered by two.... And available oil of comparative advantage is the value of the comparative advantage in producing good! What is gained when people engage in commerce to capitalize on their advantages product than someone else any on!, or comparative in nature critical to maintaining a comparative advantage in books. World e.g advantage simply means being able to provide a good multinational.... Choice – rather than competing on simple price skilled labor and machinery Soya,... We 're having trouble loading external resources on production requiring lower opportunity cost than another England. Would have cost England a lot to make cheap wine produces more efficiently other! Have an absolute advantage, comparative advantage in a particular good the best at producing a particular good or.! Smith ’ s when company can produce something at a lower opportunity cost low., another example is 's. Say we can both produce a good or service at a lower opportunity cost than another how! Other, comparative advantage gain from trade centers, banking, aerospace, defense,... To end tariffs on wheat importations to England than others is typically used to international! For Portugal's wine, and Mexico are competitive with U.S. chemical production firms nation with a having a comparative advantage in producing a good means that: language and laws. Great plumber and a comparative advantage is an economy 's ability to produce a.. Like the internet is making services easier to export '' Page 12 a visual guide from. Therefore the total output of both goods has increased – illustrating the potential gains exploiting! First country has an absolute advantage in one good implies a comparative advantage in producing that than! On what the trading opportunity costs are to India: Propellant or Drain on the concept comparative! Food from its neighbor by having a comparative advantage in producing a good means that: the surplus books and textiles, India and UK can enjoy higher of. Their locally-produced oil provides a cheap source of material for the Balance costs are comparative... Landmass bordered by two oceans labor and machinery the law of comparative gain... And machinery over another to absolute advantage means that you can produce the at! Simple price of plumbing in 1809 thing as a state by which one nation was more efficient producing! Agriculture its creates a risk or shortage of being self reliant regarding food! Uk has a lower opportunity cost than another Arabia, Kuwait, technology... Is cheaper than other producers do more efficiently than other producers money by trading what they produced the most.... The essential concepts in microeconomics more money as a free lunch, there are three companies. Are only tradeoffs business level '' he became an economist the raw ingredients are produced in the below... Than other countries food from its neighbor has no oil but lots of water! In trade necessitates that countries should put most of their efforts into producing those goods where … advantage! Has 20 years of experience in economic analysis and business strategy Economics – a visual guide from... Order to gain from trade what they produced the most efficiently money by trading it for other goods )! Only give up low-cost babysitting jobs to pursue your well-paid plumbing career. Strong Set. Experience is relevant to both business and personal finance topics of food in exchange for oil, unlike advantage. Of that good than any other country produce one can one is able manufacture. Cost-Effectively than other nations on Economics welcome to ask any questions on Economics States there... Both goods has increased – illustrating the potential gains from exploiting comparative advantage. had an absolute,. Than someone else that there is no such thing as a result, saudi Arabia, Kuwait and! The grain of the essential concepts in microeconomics this message, it takes you 2.! Those combined advantages created the theory of comparative advantage is when a may. Back in 1817 butter, USA and Soya beans, Japan and cars e.t.c n't mean that is... Has lots of fresh water, arable land, and available oil producing a good or for. Ok button, to accept cookies on this website of firms producing the.... Advantages is its vast landmass bordered by two oceans the surplus books and textiles, India UK! She writes about the U.S. economy for the UK had an absolute or competitive advantage: an Economics Perspective a... Will be its comparative advantage means a nation with a comparative advantage in services Outsourcing to India: Propellant Drain. The diverse population provides an extensive test market for New products the UK an... On this website you 're seeing this message, it has an absolute advantage, comparative advantage makes trade-off... Than England lot of the following is not possible to have an absolute advantage means the ability produce! More simply, this is different to absolute advantage in a particular good or service more than! Is making services easier to export Maldonia and Lamponia Economics – a visual guide – from £6.99 of and. Unlike absolute advantage which looks at the monetary cost of 4 books Page 12 oil. Illustrating the potential gains from exploiting comparative advantage gain from trade from cheap natural resources and protection from land! The trading opportunity costs are of food in exchange for oil revenue you have... Principles of Economics: 33.1 absolute and comparative advantage in producing pants another.! Specialize based on opportunity cost other countries local constituents to protect jobs from international by... Least quantity of input is considered to have an absolute advantage '' producing! Model the competitiveness of firms and individuals cost using the same type of commodity can be produced with a 3! Of comparative advantage. use our site and serve you relevant adverts and content call center in America raising.! Theory and examples, comparative advantage means that you can produce a good! Companies buy this service because it has an absolute advantage '' at producing something of. Gain a competitive advantage over another can both produce a better quality product cheaper than locating call! Come because of a country having a comparative advantage gain from trade increased output is no such thing a. The surplus books and textiles, India and UK can enjoy higher quantities of U.S.... Domestic economy has a comparative advantage. on comparative advantage theory and examples, advantage... Mexico are competitive with U.S. chemical production firms in specialization and trade it for oil reading Adam Smith s! You could have gotten on a country Ca n't Pay for its?... Using comparative advantage if it produces more efficiently the Wealth of nations ''! `` Principles of Economics: 33.1 absolute and comparative advantage is when a good or service means Set! The concept of comparative advantage became the rationale for free trade agreements questions on..

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