Answered: A friend tells you the following: “Free…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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A friend tells you the following: “Free trade sounds good, but a country like Honduras doesn’t have any comparative advantage compared to the United States. Therefore, trade with us will exploit them and make their economic situation worse.” Explain to your friend the error in his thinking.

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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Introduction

A free trade area (FTA) is where there are no import tariffs or quotas on products from one country entering another. Free trade occurs when goods and services can be bought and sold between countries or sub-national regions without tariffs, quotas or other restrictions being applied.

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