Explore BrainMass
Share

law of comparative advantage in international trade

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

1. Discuss the significance of the law of comparative advantage in international trade. Define a multinational corporation and explain its importance.

2. Explain the difference between the accept/reject decision and the ranking decision.

3. Discuss why might a firm choose a best efforts offering for an IPO?

© BrainMass Inc. brainmass.com October 24, 2018, 7:58 pm ad1c9bdddf
https://brainmass.com/business/multinational-corporations/law-of-comparative-advantage-in-international-trade-84759

Solution Preview

Hi there,

Here are your answers:

1. The law of comparative advantage: Mutually beneficial exchange is possible whenever relative production costs differ prior to trade.

This law applies to all exchanges, whether between individuals or nations.

Opportunity cost is the key to comparative advantage: Individuals and nations gain by producing goods at relatively low costs and exchanging their outputs for different goods produced by others at relatively low cost. All potential trading partners can gain enormously through appropriate specialization and exchange.

Oranges are grown at lower cost in Florida than in Iowa, for example, while Iowa excels in producing corn. Floridians and Iowans share gains from exchange according to comparative advantage by trading Florida oranges for Iowa corn. Similar gains are realized when Americans trade with foreigners?efficiency requires using all the world's resources in the relatively most productive ways.

Suppose Brazilians can grow coffee more easily than they can catch salmon, while Alaskans find it relatively easier to catch salmon than to grow coffee. Alaskans have a comparative advantage in salmon fishing, and Brazilians, in coffee production. Trading Alaskan salmon for Brazilian coffee clearly benefits both groups. The table below shows how both parties to a trade can gain whenever their opportunity costs differ. If Alaskans and Brazilians each specialize in their areas of comparative advantage, and if 1 pound of salmon trades for, say, 1 pound of coffee, then Alaskans can consume an extra 4 pounds of coffee daily while Brazilians can consume an additional 4 pounds of salmon. Note that the Alaskan opportunity cost of producing 1 pound of coffee is 5 pounds of salmon before trade, while each pound of coffee costs Brazilians only 1/5 of a pound of salmon.

A party has an absolute advantage if producing a good absorbs fewer resources than another ...

$2.19
See Also This Related BrainMass Solution

Economics and International Trade

1. Explain what is wrong with this statement: "Opening trade drives prices of goods and costs of factors into equality between countries, but once prices and costs equalize, there is no longer any reason to trade."

2. What is mercantilism?

3. If a country can produce a product efficiently but there is no domestic market for that product, how can that country gain by producing that product?

4. How do opportunity costs relate to the concept of comparative advantage?

View Full Posting Details