(the wine and clock radio examples), please explain (IN YOUR OWN WORDS) the conc
ID: 1156085 • Letter: #
Question
(the wine and clock radio examples), please explain (IN YOUR OWN WORDS) the concepts of Absolute and Comparative Advantage and why each makes a valid argument for international trade. Pretend you are explaining Absolute and Comparative Advantage to someone with NO knowledge of economics. You are in essence making the case for international trade and explaining it to someone else. From my experience, each concept takes a little time to understand. Your submission should be about 2-3 paragraphs long. TIP- get someone else to read over it for a general understanding of both concepts to test your explanation.
Explanation / Answer
Some countries are better off at producing certain goods and have an absolute advantage. Absolute advantage means that a country can produce a good more efficiently i.e. using less resources than the other country. For example, if Mexico can produce a bag of rice using 10 labor hours and Bangladesh can produce one bag of rice using 5 labor hours we can safely conclude that Bangladesh had absolute advantage in the production of rice since it uses less labor hours than Mexico per bag of rice.
The principle of Comparative Advantage states that a country will produce the goods which it can produce most efficiently. The country will have lower opportunity cost in the production of those goods. The country will export those goods which have a lower opportunity cost, i.e. in which it has comparative advantage) and import those goods which have a higher opportunity cost.
Example,
Hours needed to produce one bag of rice and wheat
Mexico
Bangladesh
One bag of rice
10
5
One unit of wheat
20
4
Wheat is twice as expensive to grow than rice in Mexico. For every one bag of wheat Mexico has to give up 2 bags of rice. This is the opportunity cost of wheat, which is 2 (20/10). Bangladesh has to give up 4/5 bag of rice to grow one bag of wheat. It has lower opportunity cost in growing wheat.
Hours needed to produce one bag of rice and wheat
Mexico
Bangladesh
One bag of rice
10
5
One unit of wheat
20
4
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