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Comparative Advantage

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1. Explain Comparative Advantage, specialization, and trade support by example.

2. Explain the invisible hand theorem supported by example.

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Solution Summary

The solution explains comparative advantage, specialization, and trade support.

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Comparative advantage arises because countries have different capabilities. For example, let's consider the production of wheat and cloth by Russia and Germany. Let's say that Russia can produce 3 bushels of wheat or six yards of cloth with 100 labor hours. Germany can produce two bushels of wheat or two yards of cloth with 50 hours of labor.

In this case efficiency will be judged by labor hours. We can calculate the efficiency of production by dividing the amount of the good produced by how many hours ...

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