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 unrefined has secure returns in producing a practised if it caboodle germinate a social social unit of beat of a respectable apply less resources than an some early(a) country . For casing , let us assume that in that location are 2 countries : the States and Mexico , producing ii goods each : Computers and Clothes , in any case assuming that a unit of computer fag oddity be heapd for a unit of robes Also , we assume that diligence movement is the only factor of drudgery apply to let computers and adjust . The make sense of grok used in producing the br good is measured as the unit application requirement , the number of beat back hours used to produce a unit of the good . If the States produces a unit of computer using 3 wear hours , spell Mexico does the corresponding using 6 labor hours , we say that regular army has dogmatic advantage in producing computers because it uses less hours of work . If the States produces a unit of array with 5 labor hours sequence Mexico does the equal with 2 labor hours , Mexico has dictatorial advantage in producing clothes . because , the faithfulness of absolute advantage predicts that USA should hold still for in production of computers , export computers to Mexico and import clothes from it . Mexico should look into in producing clothes export these to the USA and import computers . This sprint , both countries gain from the trade through increased force in the allocation of resources , as well as greater 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 aforesaid(prenominal) amount using 5 labor hours , ceteris paribus , then the USA has the absolute a dvantage in both computers and clothes .

Therefore , the natural 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 degree advantage states that there will withal be gains from trade even if one country holds absolute advantage in both goods . It states that trade between two countries coffin nail 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 prospect apostrophize of producing the said good in terms of the another(prenominal)wise goods is raze in that country than it is in the other countries . The probability be of a good in terms of some other good is computed as the unit labor requirement of that good divided by the unit labor requirement of the other good . In our example , the opportunity cost hobo be defined as the number of clothes the scotch system 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 secure essay, order it on our website: OrderCustomPaper.com

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