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International Trade: The Solution to Comparative Advantage

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Suppose that each U.S. worker can produce 8 units of food or 2 units of clothing daily.

In Fredonia, which has the same number of workers, each worker can produce 7 units of food or 1 unit of clothing daily.

Why does the United States have an absolute advantage in both goods? Which country enjoys a comparative advantage in food? Why?

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Comparative advantage is discussed in 138 words with a graph.

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15. (Trade Restrictions) Suppose that the world price for steel is below the U.S. domestic price, but the government requires that all steel used in the United States be domestically produced.
a. Use a diagram like the one in Exhibit 5 to show the gains and loses from such a policy.
b. How could you ...

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