Question

Are the following statements true or false? Explain in each case.

a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”

b. “Certain very talented people have a comparative advantage in everything they do.”

c. “If a certain trade is good for one person, it can’t be good for the other one.”

Answer 1

a) False, according to Ricardian Model, the trade is done on the basis of comparative advantage in production and not absolute advantage. This is because the absolute advantage only tells about which country can produce more but comparative advantage tells that ehich country can produce more efficiently. So, country having comparative advantage in production of a good will specialize in production of that good and trade it for the other good.

b)False, a person can have absolute advantage in all the thing he does as he may produce everything more than the other person but comparative advantage is based on the principle of opportunity cost and any person cannot have lower opportunity cost of production of each good as compared to other because the opportunity cost concept is relative. So, he will not have comparative advantage in everything.

c) False, trade benefits both the parties involved. If one person is trading the good in which he has comparative advantage anf the other person is also doing the same, then gains from trade will be evident fo both the parties and not just one as both are producing the good in which thet are most efficient in.