Macroeconomics Study Set 62

Business

Quiz 18 :
International Trade and Comparative Advantage

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Quiz 18 :
International Trade and Comparative Advantage

Justification for better off exchange Person A has 12 shirts and person B has 6 pairs of shoes. In this case, the money value of the₁2 shirts is equal to 6 shoes. Therefore, 2 shirts is equal to 1 pair of shoes. If person A exchanges 6 shirts for 3 pairs of shoes with B, then there is no financial gain for both of them as 2 shirts are equal 1 pair of shoe. Even though there is no financial gain from this transaction, both will be better off than before. Because before this transaction person A had more shirts but does not have any shoes and person B had enough shoes but does not have any shirts. After this transaction, both person A and B have shirts and shoes. Since both the goods shirts and shoes are available for these two persons, both the persons become better off due to this transaction.

f. Price of the good at the time of trade In England, the value of 1 barrel wine is equal to 4 yards of cloth. In Portugal, the value of 1 barrel wine is equal to 2 yards of cloth. The trade will take place at the price of 1 barrel of wine, which lies between the price of 2 and 4 yards of cloth.

Fallacy statement regarding trade It was believed that a country benefitted from the trade only by making the other nation worse off. This statement is not true. Both the countries can gain in trade by exchanging the goods for which they have absolute advantage. Example: Assume country A can produce only 80 units of mobile and 20 units of television and country B can produce 80 units of mobile anD₁20 units of television. In this situation, country A has absolute advantage in the production of mobile and country B has absolute advantage in television production. Therefore, country A should concentrate on mobile production and country B should concentrate on television production. In this situation, both the countries can gain through the trade since both countries are exchanging goods for which they have absolute advantage.