If you want to examine trade relations between two countries, do you look at the absolute...

If you want to examine trade relations between two countries, do you look at the absolute advantage of each country or the comparative advantage? explain why?

Expert Solution

COMPARATIVE ADVANTAGE examine trade relation between two countries .

Take example

With a fixed amount of resources the usa and south korea can produce a following amount of apples and smartphone

	USA	S KOREA
APPLE	39	24
SMARTPHONE	13	12

ABSOLUTE ADVANTAGE : when a country produce more of particular good with certain amount of resources. Then they have absolute advantage

In our example , USA has absolute advantage in the production of both apple and smartphone . Usa is more efficient than korea production of these good

COMPARATIVE ADVANTAGE : when a country produce good at lower opportunity cost than other country than we have comparative advantage .

as you see we take trade decision on the basis of comparative advantage not on the basis of absolute advantage . Usa has comparative advantage in apple and south korea has comparative advantage to produce smartphone . Trade happen between two countries both benefits from them , leads to trade specialization .

Rahul Sunny answered 2 years ago

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