Question

comparative cost advantage theory

Q1) Analyse the 2X2 modelgiven above and state if trade will take place or not between the 2
countries. Justify your answer.​

Answer 1

Answer:

It can be argued that world output would increase when the principle of comparative advantage is applied by countries to determine what goods and services they should specialise in producing. Comparative advantage is a term associated with 19th Century English economist David Ricardo.

Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. There are two types of cost advantage – absolute, and comparative.