Question

Discuss the importance of comparative advantage and how this influences trade between countries.

Answer 1

Comparative Advantage is a method to improve the productivity given the limited resources. According to comparative advantage, the country that specializes in producing a particular good should aim at producing that product by applying less resources as compared to the other country who produces less output with the same number of resources. In other words, the country will low opportunity cost should produce that good as compared to the country which has high opportunity cost. By producing the goods with specialization, the trade becomes beneficial for both the countries.

For example, If I can produce 10 units of good X and 5 units of good Y by devoting equal time in a day, and my partner can produce 4 unit of good X and 15 units of good Y in a day, I should aim at producing Good X only as I have comparative advantage over that, and my partner should produce good Y only as by doing this, I will produce 20 units of good X and my partner will produce 30 units of good Y.

And by this form of trade, we both will be better off with higher output in the same time and resources.

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