Comparative Importance In International Trade

Decent Essays

Denissa Gonzalez Macroeconomic Spring 2017 Final Exam Essay Chapter 20: What is the comparative advantage, and why is it important in international trade? A comparative advantage states that aggregate output is maximized when countries specialize in the production of goods for which they are the lowest opportunity cost producer, and then trade for other goods. This explains how countries can improve their situation through trade, rather than producing all goods themselves. B. define the term in economic” absolute advantage” and illustrate with an example. When one nation can produce a product at lower cost relative to another nation, it is said to have an absolute advantage in producing that product. A worker in Saudi Arabia can produce more oil, by a margin of 6 barrels to 2 barrels. However, a worker in the United States can produce more corn, by a margin of 8 bushels to 1 bushel. C. what benefit are to be gained from counties producing according to the concept of comparative advantage? What it a country is absolutely more productive in all good. When countries produce according to the concept of comparative advantage, and then trade, the consumption possibilities expand for all countries involved. This is because producing goods for which a country has a comparative advantage means that goods are produced at the lowest relative opportunity cost, thus freeing resources for the production of more goods. Even if a country has an absolute advantage, it will still

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