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Comparative Advantage and Opportunity Cost

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1. Intra-industry trade involves countries exporting and importing the same or very similar goods. Why would countries export and import the same or similar products? Please respond in at least 160 words or more.
2. You are an adviser to a foreign government. Until now, government policy has been to severely limit imports, which has resulted in a low level of exports. The government is now considering a policy to allow freer trade. What are the three strongest reasons that you can offer to the government about why the policy shift will be good for the country? Please respond in at least 160 words or more.
3. Do you agree or disagree with this statement? "Opening up free trade hurts people in import-competing industries in the short-run, but in the long-run, when people and resources can move between industries, everyone gains from free trade." Explain.

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Solution Summary

A discussion on the benefits of international trade and comparative advantage.

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1) There are several reasons countries might export and import the same or similar products. The slight differences between products can create the variety that consumers are looking for. Take for instance, the automobile industry. Even though America has three major automobile manufacturers that can more than meet the domestic needs of American consumers, Americans enjoy those slight differences between American and foreign cars. These slight differences are styling and even just the name recognition of those cars. Another reason is that there might be some seasonality to producing certain goods. For instance some industries such as fishing, might have some seasons where a country produces more than can be consumed domestically, however, other seasons perhaps the fish are harder to come by due to changes in weather and ocean temperatures. In this case a northern hemisphere country might trade with a southern hemisphere country where each has a fruitful summer fishing season when the other is having a ...

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Robert Reinhart, MBA
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  • MBA, Merage School of Business, Univ of Cal, Irvine
  • BA, Univ of Cal, Irvine
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