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 the partial globalization of international finance, Explain the Par...

Explain the Partial Globalization of International Finance

Tariffs, what are the different types of tariffs?

what are the different types of tariffs?

IMF, what are the aims aond objective and purpose of IMF

what are the aims aond objective and purpose of IMF

CSA, what is meant by country specific advantage?

what is meant by country specific advantage?

Extensive import-substitution industrialization, Q. The United States, as ...

Q. The United States, as it began its long and unbeaten growth in the early 19th Century, consciously promoted domestic production through such activities as tariffs, Clay's Ameri

Explain why a london eurobank has a competitive advantage, Q. Expla...

Q. Explain why a London Eurobank has a competitive advantage over a bank in New York in attracting dollar deposits. Answer: It is able to pay more because the London ba

Long run of the monetary approach, Q. What are the predictions for ...

Q. What are the predictions for the long run of the Monetary Approach? Answer: Money supplies- Known the equations E $/E = P US /P E P US = M S US /L(R $

Run the gravity model of FDI via Eviews, ln?(?FDI?_t )=ln??(C)+? ln?(?CNGDP...

ln?(?FDI?_t )=ln??(C)+? ln?(?CNGDP?_t )+ßln?(?GDP?_t ?)+a ln?(DIST)+fCAFTA+?_(1 ) ln?(?EXPORT?_t )+?_2 ln?(?GDPM?_t )+?_3 ln?(?CPI?_t )+?_4 ln?(?GDPA?_t )+e

Fiscal policy, What are the government's fiscal policy options for a recess...

What are the government's fiscal policy options for a recessionary gap caused by cost-push inflation?  Use the aggregate demand-aggregate supply model to show the impact of these p

Absolute Advantage trade Theory, Critically evaluate adam smith''s theory o...

Critically evaluate adam smith''s theory of absolute advantage, outlining the assumptions necessary for the theory. Criticism of the theory?

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