Question

3. Can a country who is most or least efficient in producing everything benefit from trade? How?

Answer 1

Yes, a country who is most or least efficient in producing everything can benefit from trade. This is because the country will have a higher opportunity cost in some of those goods, comapred to its trading partners. So, it will be beneficial for both the countries to produce only those goods in which they have a comparative advantage and exchange it for those with higher opprotunity cost.

When a country is most efficient in producing everything, it has an absolute advantatge in production of all the goods it trades. But the concept of comparative advantage enables us to compare the opportunity cost and thereby comparative advantage and decide which country shoud produce what good. For exmple,

Spain is more effcient than Portugal in the production of both ham and cod fish. That is, Spain has an absolute advantage in both the products. But Portugal has a comparative advantage in Codfish as it has to give up only 0.2 units of ham to produce a unit of cod fish compared to Spain, which has to give up 0.6 units of ham. On the other hand, Spain has a comparative advantage in the production of ham as it has to give up only 1.67 units of cod fish to produce a unit of ham compared to Portugal, which has to give up 5 untis of codfish. So, both Portugal and Spain will benefit if Portugal produces cod fish and Spain produces ham and exchange with each other.