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Comparative Advantage and International Trade

   

Added on  2020-05-04

7 Pages1104 Words57 Views
Running head: INTERNATIONAL ECONOMICS International EconomicsName of the StudentName of the UniversityAuthor Note

1INTERNATIONAL ECONOMICS Table of ContentsAnswer 1:.........................................................................................................................................2Theory of Comparative Advantage.............................................................................................2Comparative Advantage versus Absolute Advantage.................................................................2Comparative Advantage and Gains from Trade..........................................................................4Answer 2:.........................................................................................................................................4Economies of Scale......................................................................................................................4Economies of Scale and International Trade...............................................................................5References........................................................................................................................................6

2INTERNATIONAL ECONOMICS Answer 1: Theory of Comparative Advantage One of the most robust theories in the international trade is the theory of ComparativeAdvantage, as has been proposed by David Ricardo. According to the comparative advantagetheory of trade, all other things remaining the same, a country specializes in the production ofthat commodities or services and also exports those in which the country enjoys a comparativeadvantage in production, over the other countries with which it is trading. On the other hand, acountry imports those goods and services, in the production of which it has less comparativeadvantage or more disadvantage (Laursen, 2015). The Comparative Advantage Model works on several assumptions, which includes thefollowing: The only factor of production is labor. There is free trade in the economy. There are constant returns to scale in the economy. There is perfect mobility of labor in the domestic territory but labor is immobileinternationally (Gopinath, Helpman & Rogoff, 2014). Comparative Advantage versus Absolute Advantage The Absolute Advantage theory asserts that the countries will produce and export thosecommodities and services in the production of which they have an absolute advantage.

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