How differences in relaive prices befor internaional trade determines which products countries will export after international...

How differences in relaive prices befor internaional trade determines which products countries will export after international trade is opened up?

Expert Solution

Relative price refers to the price of a good or a service, in measure or relation to the price of any other good or service. It is usually calculated as a ratio.

If there is a relative price difference between two countries' commodities, it means that one of the countries has comparative advantage over other. Comparative advantage means that the same good can be produced at a lower price in one of the countries. This lays the foundation for 'trade' between the two nations.

If the relative price of a commodity X in one country A is less than the other country B, it means that country A has a comparative advantage of producing that commodity at a lower cost than country B. This also means that country A would specialize in the production of that commodity it has a comparative advantage in. The second country B might have a comparative advantage in some other commodity, say Z, and would specialize in it.

Now, the trade would take place between the two nations. Country A would export part of its specialized good production X to country B and country B would export part of its specialized good production Z to country A. Thus, a country having a comparative advantage in a good exports it to the country having a comparative disadvantage in the same good. This continued process results in an international trade.

Rahul Sunny answered 2 years ago

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