Concept of comparative advantage, International Economics

Assignment Help:

The Concept of Comparative Advantage is explained below:

To illustrate the concept of the comparative advantage, we take the instance of two equi-sized equi-endowment countries, which are US and UK. US produces 40 and 60 units of cotton and food p.a. respectively (using all available resources), while the UK produces 30 and 20 units of cotton and food p.a. respectively (using all the available resources). Clearly, the US has complete advantage in the production of both cotton and food. By absolute advantage it is meant that the US is more efficient at producing food and cotton both than the UK. But, upon computing the opportunity costs of producing cotton and food in the either country, is revealed that the opportunity cost of producing one unit of the cotton in the US is 1.5 units of food, while the opportunity cost of producing one unit of food in the US is 0.67 units of cotton. Similarly the opportunity cost of producing one unit of the cotton in the UK is 0.67 units of food, whereas the opportunity cost of producing one unit of food in the UK is 1.5 units of cotton. Hence, the US has a lower opportunity cost (comparative advantage) in production of food while the UK has a lower opportunity cost (comparative advantage) in production of cotton. By specializing in the goods/commodities they have comparative advantage in and then trading between them, both the countries can improve their consumption possibilities beyond those implied by autarky (that is a situation of no trade where the PPF and CPF are the same).

 




 


Related Discussions:- Concept of comparative advantage

Explain effects of permanent increase in u.s. money supply, Explain the eff...

Explain the effects of a permanent increase in the U.S. money supply in the short run and in the long run.  Assume that the U.S. real national income is constant. A raise in th

Strategic groups and strategic characteristics, Strategic groups      ...

Strategic groups        "Strategic groups are organizations within an industry with similar strategic characteristics, following similar strategies or competing on similar bas

Balance of payments accounts, Q. Consider how the United States' balance o...

Q. Consider how the United States' balance of payments accounts are affected when U.S. banks give two billion in debt owed to them by the government of Argentina. Answer: In

What quantity could it sell at what price, Q. The figure below shows the d...

Q. The figure below shows the demand and cost functions facing a Brazilian Steel producing monopolist. If it were unable to export, and was constrained by its domestic market, wh

Discuss benefits and costs of joining a fixed-exchang area, Q. Discus...

Q. Discuss the benefits and costs of joining a fixed-exchange area. Answer: Benefits generally gains from the stability of the area and reduced uncertainty. The compete

Composition of production in trade, Q. Using the diagram, show what happen...

Q. Using the diagram, show what happens to the composition of production (that is quantity of cloth per 1 unit of food) in Australia once trade is established between the two coun

How much steel could the firm sell domestically, Q . While selling exports...

Q . While selling exports it could also maximize its domestic sales by equating its marginal (opportunity) cost to its marginal revenue of $5. How much steel could the firm sell

Why did they enact these protectionist policies, Q. In recent cases, the U...

Q. In recent cases, the U.S. placed quotas or protectionist tariffs on imported microchips and imported steel. In both cases the damage to "downstream" industries was obvious to

What is an sdr, Q. What is an SDR? Answer: An SDR abbreviation ...

Q. What is an SDR? Answer: An SDR abbreviation of Special Drawing Right at the IMF and holds a place as a world reserve currency some countries especially those that do

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd