Explain The Law Of Comparative Advantage And Absolute Advantage And Why Countries Gain From Trade. Provide Examples.

Absolute Advantage and Comparative AdvantageIt is said that a land has out-and-out(a) advantage in producing a unplayful if it open suggest wee a building block of a true victimization less resources than an separatewise country . For example , let us assume that there are cardinal countries : the States and Mexico , producing twain adepts from each one : Computers and Clothes , also assuming that a whole of figurer sewer be distributed for a unit of measurement of wear apparel Also , we assume that intentness is the only element of payoff utilise to produce computers and clothe . The amount of dumbfound apply in producing the br good is measured as the unit travail requirement , the number of agitate hours used to produce a unit of the good . If ground forces produces a unit of computer using 3 prod ho urs , musical composition Mexico does the very(prenominal) using 6 dig out hours , we say that the States has supreme advantage in producing computers because it uses less hours of work . If the States produces a unit of change state with 5 labor hours while Mexico does the comparable with 2 labor hours , Mexico has imperious advantage in producing clothes . therefore , the law of absolute advantage predicts that USA should intend in production of computers , export computers to Mexico and import clothes from it . Mexico should retard in producing clothes export these to the USA and import computers . This snatch , both countries gain from the duty through increased force in the allocation of resources , as well as not bad(p) amount of goods from importsHowever , if we change the situation , where USA utilizes 4 labor hours to produce a unit of clothes while Mexico produces the resembling amount using 5 labor hours , ceteris paribus , then the USA has the absol ute advantage in both computers and clothes ! .

indeed , the law of absolute advantage predicts that there will be no trade because the USA would not gain from trade with MexicoHowever , the law of comparative advantage states that there will eliminate be gains from trade even if one country holds absolute advantage in both goods . It states that trade between two countries brook be beneficial if each country exports the goods in which it has a comparative advantage A country has a comparative advantage in producing a good if the circle cost of producing the said good in terms of the different goods is lower in that country than it is in the former(a) countries . The opportunity cost of a good in terms of opposite good is com puted as the unit labor requirement of that good divided by the unit labor requirement of the other good . In our example , the opportunity cost can be defined as the number of clothes the saving would have to give up in to produce a unit of cheese . Using our second example , the USA produces a unit of computer using 3 labor hours and a unit of clothes using 4 labor hours , the opportunity cost of computers in terms of clothes is 3 /4 . On the other hand , with labor hours of 6 and 5 in producing...If you want to get a rampant essay, order it on our website: OrderEssay.net

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