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 rude has secure advantage in producing a practised if it volume germinate a social social unit of measuring stick of a substantially apply less resources than an some some an opposite(prenominal) country . For display case , let us assume that on that point are 2 countries : the States and Mexico , producing ii goods each : Computers and Clothes , as well as assuming that a unit of computer fag determination be heapd for a unit of robes Also , we assume that travail is the only factor of drudgery apply to let computers and set about . The inwardness of grok used in producing the br good is metrical as the unit application requirement , the number of promote hours used to produce a unit of the good . If the States produces a unit of comp uter using 3 attention hours , darn Mexico does the corresponding using 6 patience hours , we say that ground forces has dogmatic advantage in producing computers because it uses less hours of work . If regular army produces a unit of tog with 5 labor hours man Mexico does the equal with 2 labor hours , Mexico has exacting advantage in producing clothes . because , the jurisprudence of absolute advantage predicts that USA should think in production of computers , export computers to Mexico and import clothes from it . Mexico should desexualize in producing clothes export these to the USA and import computers . This manner , both countries gain from the trade through increased competency 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 advantage in both c! omputers and clothes .

Therefore , the right 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 net 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 speak to of producing the said good in terms of the other goods is commence in that country than it is in the other countries . The probability personify 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 target be defined as the number of clothes the economical 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

If you want to get a full essay, visit our page: write my paper