Absolute disadvantage in the production

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Reference no: EM131425958

If Nation 1 has an absolute disadvantage in the production of fur hats and shoes when compared to Nation 2, it is still possible that Nation 2 can move resources into the production of shoes and trade for fur hats imported from N1 and thereby make consumers in both nations better off if:

Shoes imported from Nation 2 require that relatively fewer fur hats be produced than would be the case in Nation 1.

Nation 2 can make fur hats by giving up relatively fewer shoes than Nation 1.

Nation 1 can make a fur hat by giving up the same number of shoes as in Nation 2.

In Nation 1, the relative price of shoes to fur hats is higher than it is in Nation 2, thus giving Nation 1 an incentive to import shoes from Nation 2 in exchange for relatively cheaper fur hats exported to N2.

In Nation 2, the relative price of shoes to fur hats is higher than in Nation 1, thus giving Nation 2 an incentive to export over priced shoes to Nation 1 in exchange for fur hats that cost about the same.

Reference no: EM131425958

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