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economics please just one question?
explain why trade occurs because of comparative advantage, using a minimum of at least two specific countries and products as examples.
1 Answer
- 1 decade agoFavorite Answer
Comparative advantage refers to the ability of a country to produce goods or services more efficiently because of lower opportunity costs. This explains why trade is still more beneficial even if one country seems to be better at producing both of two goods, compared to another country.
This has something to do with the way a country should allocate its resources:
Suppose country A is extremely better than country B in producing good X. Suppose also that country A is slightly better than country B in producing good Y. Then because of the concept of opportunity costs, you can infer that country A should just pour all its resources in producing good X and just import good Y from country B. Similarly, country B should just import good X.
As for a clearer example, check out Example 2 in wikipedia's article: