Consider a nation with a large economy, like Canada, and a nation with a smaller economic...

Consider a nation with a large economy, like Canada, and a nation with a smaller economic output, like Costa Rica. How can Canada, with an absolute advantage in the production of most goods and services, benefit from trade with Costa Rica?

Expert Solution

Question

Trade is undertaken on basis of comparative advantage.

Comparative advantage is measured in terms of opportunity cost of production.

If a country is able to produce a good at lower opportunity cost relative to another country then, in that case, it has comparative advantage in the production of such good.

So, even though, Canada has absolute advantage in the production of most goods and services relative to Costa Rica, however, there are many goods and services in which it has comparative disadvantage relative to Costa Rica.

If Canada produces these goods and services domestically, it has to give up more of other goods and services relative to if it imports such goods from Costa Rica.

So, trade with Costa Rica can help Canada in utilizing resources in more efficient manner and maximizing its output and consumption.

Thus, Canada can benefit from trade with Costa Rica in the sense that it enable Canada to increase both its production and consumption.

Rahul Sunny answered 1 year ago

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