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Chapter 33: Q.9 (page 803)

Under what conditions does comparative advantage lead to gains from trade?

Short Answer

Expert verified

When efforts are focused on product they specialize in and producing at a lower opportunity cost for other countries.

Step by step solution

01

Step 1. Introduction

Opportunity cost refers to the cost of sacrificing or giving up the second best alternative. Comparative advantage refers to the ability of a person, firm, or region to produce a product at a comparatively lower opportunity cost than others.

02

Step 2. Explanation

People or firms who possess a comparative advantage in any product can gain it through specialization. When all the efforts are focused on producing the good or service they have a comparative advantage in, they can gain achieve specialization. By trading the products they specialize in and depending on others for goods they do not specialize in, benefits can be obtained from trade.

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Most popular questions from this chapter

Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain

How does comparative advantage lead to gains from trade?

Can a nation鈥檚 comparative advantage change over time? What factors would make it change?

Why might a low-income country put up barriers to trade, such as tariffs on imports?

Are the gains from international trade more likely to be relatively more important to large or small countries?
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