Question

Use comparative advantage theory to explain what may happen to the Uk's trade due to Brexit

Answer 1

UK has the chance of leaving European Union, this is called brexit.

If it happens the country may face disaster in trade. It is explained through comparative advantage as below:

Comparative advantage: This is the comparison between the two products, of which one has lower opportunity cost than other.

Opportunity cost is the amount of benefit foregone for undertaking an alternative course of action.

Opportunity costs are given below (imaginary data):

Items	Production	Opportunity cost
Pen	50	65/50 = 1.3
Car	65	50/65 = 0.77

The lower opportunity cost is 0.77 for the item car; therefore, the comparative advantage of the country is producing car only but not pen.

If the country produces only car, there will be no pen; but as per the necessity, pen is also required by the country. The country in that case can import pen from other European country having comparative advantage of producing it; but such facility may not be there since UK escapes from the union.

Therefore, the country has to look in other countries in different continent (like America, Australia, etc). Such import might be expensive too because of the existence of different currencies. Overall, there might be trade deficit (means imports might be higher than exports).