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International Trade: Theory of Comparative Advantage

A. Construct a quantitative example to illustrate the principle of comparative advantage.
b. What are dynamic effects of free trade and why might they be important?

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International Trade: Theory of Comparative Advantage & Free Trade

Comparative Advantage
Theory of comparative advantage explains that a country will produce only that product which it is able to be produced more efficiently. Theory focuses on the relative efficiency of the countries for producing goods (Sharan, 2003).
Assume Mexico and Britain; each of the two has 100 unit of labour. One half of the labour force is used for the production of beer and other half is used for the production of wheat in absence of trade. In Mexico, 10 units of labor are required to produce either one liter of beer or one kg of wheat. On the country, in Britain, 5 units of labor are required to produce one liter of beer and 8 units of labor are required for producing one kg of wheat. If one looks at this situation from the view point of absolute cost advantage, there will be no trade, as Britain possesses absolute cost advantage in the ...

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