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comparative advantage

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Describe how international trade affects our economy. How the concept of comparative advantage was relevant to the trade negotiations? You may use the following scenarios in your discussions. Imagine that you belong to one of the following Island.

Crusoe Island
· Abundant population
· Rich in coconuts
· Poor in bananas
· Rich in pearls
· Most people live in thatched huts
· Wood frame house is a luxury
· Defense program = spears
Dafoe Island
· Sparse population
· Poor in coconuts
· Rich in bananas
· Rich in lumber
· Only the very rich have pearls
· Defense program = bows & arrows
Historically, you have kept close to your own island, but with the discovery of "sail power" you have begun to explore and navigate to the other islands. This has prompted you to consider the possibility of trading with the people of the other island

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ANSWERS
A country or a group has a comparative advantage over another if it can perform an activity at a lower opportunity cost relative to the other country or group. An opportunity cost is the "alternative return that investors forgo by choosing a particular course of action and the value of something in its best alternative use" (CFA 2008, p. G-34).
The discovery of "sail power" provides ...

Solution Summary

The economic principle of comparative advantages is utilized.

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