Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative advantage in semiconductors

Suppose the US and Mexico both produce semiconductors and auto parts and the US has a comparative advantage in semiconductors while Mexico has a comparative advantage in auto parts. Also suppose that the US has an absolute advantage in the production of both semiconductors and auto parts. The US should

A. import semiconductors from Mexico and export auto parts to Mexico.

B. export both semiconductors and auto parts to Mexico.

C. not trade semiconductors and auto parts with Mexico.

D. export semiconductors to Mexico and import auto parts from Mexico.

Solutions

Expert Solution

Option D: Export semiconductors to Mexico and import auto parts from Mexico.

Explanation: The US has the absolute advantage in the production of both the semiconductors and the auto parts. That means the Maxico has absolute disadvantage in the production of both the semiconductors and the auto parts. So, the comparative advantage theory of trade suggest that the a country should specialise and export the product in which it has a comparative advantage or the higher absolute advantage. On the other hand, a country will import in which the absolute disadvantage is higher.

So, the US has a comparative advantage in the production of the semiconductors and Maxico has a comparative advantage in the production of the comparative advantage. Thus, US will specialise and export the semiconductors to Maxico and the Maxico will specialise and export the auto parts to US.

Rahul Sunny answered 1 year ago

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