Question

Using specific numbers, prove the following.

1. If two people have the same opportunity cost of producing goods then there is no possibility for there to be a mutually beneficial trade.

2. If two countries have very different opportunity costs there is a greater opportunity for mutually beneficial trades compared to two countries having different opportunity costs that are not that different.

3. Explain why it makes sense that if a country can sell a good for a lower price than other countries that the country has a comparative advantage over other countries.

4. Explain what is meant by the following assertion: “free trade results in goods being produced by producers who have lower opportunity costs of producing the good.”

Answer 1

1 by comparative advantage we mean OPPUTUNITY cost is lower. Since the country produces it at lower price than others(in other words at lower cost) the country has comparative advantage in it. In other words the country can produce this good more efficiently than other goods

2 it means goods are produced at lower cost if trade is allowed between countries. Those having comparative advantage in a good produce that good and supply it to other countries in exchange for goods in which the country has comparative disadvantage