Question

In: Economics

Explain comparative advantage theory in 2 contexts - There are more than two goods producing and...

Explain comparative advantage theory in 2 contexts
- There are more than two goods producing and consuming.
- There are 3 countries and two goods.

Solutions

Expert Solution

1. Comparative advantage in two countries and more than two commodities.
Firstly we must express the price of all commodities in terms of one nation's currency. Suppose there are two nations - U. S and U.K.
There are four commodities A, B, C, D.
eg :- Pound 1 =$2
Price of A in U.S. is 2 an 12 in U.K. Price of B in U.S is 4 and 8 in U. K. Price of C is 6 in U. S and 6 in U.K. Price of D is 8 in U.S and 4 in U.K.
Price of commodity A and B are lower in U.S than U.K. But price of c is equal in both nation. So U.S. export commodities A and B and import D and E commodities from U.K.
Comparitive Advantage with more than two nations
2. If there is 3 nations A, B, C and two commodities- wheat and cloth
Rank these nation on the basis of Pw/Pc. Rank these three nations 1< Pw/Pc <3
Nation A has 1st rank, B has 2nd rank and C has 3rd rank.
Nation A export wheat to B and C in exchange of cloth.Nation B export wheat to C in exchange for cloth.


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