Question

1. Explain why trade leads to mutually beneficial gain

2.Think about an example from your own life, someone you know, sports, entertainment, or business that demonstrates how comparative advantage is used in the real world.

Answer 1

SOLUTION

1.TRADE-MUTUALLY BENEFITIAL GAIN

Trade between two agents or countries allows the countries to enjoy a higher total output and level of consumption than what would have been possible domestically. Comparitive advantage and opportunity costs determine the terms of trade for exchange under which mutually benefitial trade can occur. Terms of trade (also called, "trading price") the price of one good in terms of the other that two countries agree to trade at; benefitial terms of trade allows a country to import a good at a lower opportunity cost than the cost for them to produce the good domestically, thus the country gains from trade. Trade allows each country to take advantage of lower opportunity costs in the other country. It shows that the gains from international trade result from pursuing comparitive advantage and producing at the lower opportunity cost. The idea of gains from trade was at the core of classical theory of the international trade propounded by Adam Smith and David Ricardo. According to Smith, the gains from trade arises from the advantages of division of labour and speacialisation- both at the national and international level. Such advantages arises, due to the absolute differences in costs.

2.EXAMPLE OF A BUSINESS HAVING A COMPETITIVE ADVANTAGE IN THE REAL WORLD

• So back in the previous examples of USA producing planes and China producing electronics with the same comparitive advantages over each other. We know in the real world examples Boeing in the USA produces planes and Huawei in China ( along with many others) produces electronics.
• And also oil-producing nations have a comparitive advntage in chemicals.Their locally produced oil-providers provides a cheap source of material for the chemicals when compared to countries without it.