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

Complete equalization of factor prices, Q. International trade leads to co...

Q. International trade leads to complete equalization of factor prices. Discuss. Answer : This statement is usually "true...but". Under a limited and strict set of assumpti

Explain why the distinction between debt and equity finance, Q. Explain wh...

Q. Explain why the distinction between debt and equity finance is useful in analyzing the response of developing countries to unforeseen events such as recession or terms of trade

Theory of consumer behavior, Q. Write about the assumptions of the theory o...

Q. Write about the assumptions of the theory of consumer behavior based on the cardinal utility approach. 1. Rationality- It is assumed that the consumer is a rational being in

Free trade, what are the limitations of net barter terms of trade

what are the limitations of net barter terms of trade

Free trade, how to determine free trade for small country

how to determine free trade for small country

Effects of 9/11 on the size of the eurocurrency markets, Q. What do you exp...

Q. What do you expect would be the effects of 9/11 on the size of the Eurocurrency markets? Answer: Will increase because of fear that foreign deposits in the United States wi

How can long-run values in the real exchange rate change, Q. How can ...

Q. How can long-run values in the real exchange rate change? Answer: A elevate in world relative demand for U.S output origins a long-run real appreciation of the dollar

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