Explain The Law Of Comparative Advantage And Absolute Advantage And Why Countries Gain From Trade. Provide Examples.

Absolute Advantage and Comparative AdvantageIt is said that a unpolished has secure advantage in producing a practised if it spate germinate a social social unit of measurement of a good apply less resources than an some other country . For example , let us assume that there are 2 countries : the States and Mexico , producing ii goods each : Computers and Clothes , also assuming that a unit of computer fag end be heapd for a unit of robes Also , we assume that undertaking is the only factor of drudgery apply to produce computers and array . The amount of grok used in producing the br good is measured as the unit application requirement , the number of labor hours used to produce a unit of the good . If the States produces a unit of computer using 3 labor hours , while Mexico does the corresponding using 6 labor hours , we say that USA has dogmatic advantage in producing computers because it uses less hours of work . If USA produces a unit of clothes with 5 labor hours while Mexico does the equal with 2 labor hours , Mexico has absolute advantage in producing clothes . because , the law of absolute advantage predicts that USA should intend in production of computers , export computers to Mexico and import clothes from it . Mexico should determine in producing clothes export these to the USA and import computers . This panache , both countries gain from the trade through increased faculty in the allocation of resources , as well as greater amount of goods from importsHowever , if we change the situation , where USA utilizes 4 labor hours to produce a unit of clothes while Mexico produces the aforesaid(prenominal) amount using 5 labor hours , ceteris paribus , then the USA has the absolute advantage in both computers and clothes .

Therefore , the law of absolute advantage predicts that there will be no trade because the USA would not gain from trade with MexicoHowever , the law of comparative advantage states that there will withal be gains from trade even if one country holds absolute advantage in both goods . It states that trade between two countries can be beneficial if each country exports the goods in which it has a comparative advantage A country has a comparative advantage in producing a good if the prospect cost of producing the said good in terms of the other goods is lower in that country than it is in the other countries . The probability cost of a good in terms of some other good is computed as the unit labor requirement of that good divided by the unit labor requirement of the other good . In our example , the opportunity cost can be defined as the number of clothes the economic system would have to give up in to produce a unit of cheese . Using our second example , the USA produces a unit of computer using 3 labor hours and a unit of clothes using 4 labor hours , the opportunity cost of computers in terms of clothes is 3 /4 . On the other hand , with labor hours of 6 and 5 in producing...If you want to get a secure essay, order it on our website: Orderessay

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