Question

B. What is the most plausible trade model (theory) that should be used to explain why Paris and Rome are still the MOST IMPORTANT fashion centers (Chanel, Vuitton, Pierre Cardin, Zegna, Ferragamo etc.,) or Switzerland is the center of high quality watch manufacturing (Patek Philippe, Breguet, Rolex etc., ) despite the fact that labor costs are relatively high in these countries and cities. Explain and DRAW A GRAPH TO ANALYZE THE SITUATION.

Answer 1

Answer - COMPARATIVE ADVANTAGE THEORY:

It is given by David Ricardo in 19th century.It actually includes the ability to make goods and services with an advantage in opportunity costs i.e. this gives the power to the nation to sell its stock by offering better deal than competators

Talking about advantage, does not only means that one is having higher yield than others

Example , of Switzerland for watches and other good be corn with USA a high yielding nation let say USA has more productivity with than Switzerland in both

USA has 10x more productivity for corn and 2x for watches than Switzerland, thereafter for USA most beat is corn . Now coming to Switzerland let say it's productivity is 1/10 for corn and .5 for watches but for Switzerland its most best product is watches over corn . Even if the LABOR COST COULD BE HIGH ,for trade money costs should be ignored rather opportunity costs should be focused on.

here even though USA has absolute advantage in both corns and watches by 10 times and 2 times than Switzerland but for it most profitable will be with corn as the greatest gap is for corn and will specialise in it ,however for Switzerland has lesser gap bad condition against USA is in Watches so it should specialise in it.

Conclusion

Therefore ,what matters is not the Monetory aspect only, in order to take advantage of trade , opportunity cost should be observed.

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