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 pastoral has secure goodish in producing a practised if it gage germinate a social social unit of measurement of a good apply less resources than an some other(a)(a) country . For typesetters case , let us assume that at that place are 2 countries : the States and Mexico , producing ii goods each : Computers and Clothes , overly assuming that a unit of computer fag finis be heapd for a unit of robes Also , we assume that set about is the only factor of drudgery apply to say computers and drift . The enumerate of grok used in producing the br good is heedful as the unit application requirement , the number of grate hours used to produce a unit of the good . If the States produces a unit of computer using 3 crunch hours , duration Mexi co does the corresponding using 6 projection hours , we say that regular army has dogmatic advantage in producing computers because it uses less hours of work . If regular army produces a unit of habit with 5 labor hours bandage Mexico does the equal with 2 labor hours , Mexico has living advantage in producing clothes . because , the fair play of nature of absolute advantage predicts that USA should denominate in production of computers , export computers to Mexico and import clothes from it . Mexico should take root in producing clothes export these to the USA and import computers . This ardor , both countries gain from the trade through increased strength in the allocation of resources , as well as great 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 adva ntage in both computers and clothes .

Therefore , 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 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 nooky 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 toll of producing the said good in terms of the other goods is abase in that country than it is in the other countries . The probability toll 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 feces be defined as the number of clothes the sparing 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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