What are the benefits gained from trade? Calculate and show them.
Transcribed Image Text:Hours of Labor Required to produce X and Y
Country A
Country B
Good X
15
12
Good Y
30
10
Definition Definition Any of the various net benefits or net gains that a country or trader makes by participating in international trade.
Expert Solution
Step 1
An economy possesses a comparative advantage in the production of a good or service if it can produce the same at a lower opportunity cost than its rivals. David Ricardo's theory of comparative advantage asserts that an economy can engage in mutually beneficial trade with another country, even if the other country is better at producing every good and service, by specializing in the production of good it has a comparative advantage in and exchanging the surplus for the good it has a higher opportunity cost in production.
Step 2
Considering the given data of the number of labor hours required to produce Good X and Good Y for Country A and Country B:
Country A
Country B
Good X
15
12
Good Y
30
10
Calculating production possibilities from the schedule above, in the absence of trade, Country A can produce 2 units of Good X or 1 unit of Good Y in 30 hours of labor. Similarly, Country B can produce 2.5 units of Good X or 3 units of Good Y in 30 hours of labor, assuming 30 hours of labor as the standard denomination for a comparison.
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
