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Clearly Explain And Discuss The Theory Of Comparative Advantage. Given The Economic Benefits Of Trade (According To The Above Theory) Why Do Some Countries (Give Examples) Attempt To Restrict Trade?

925 words - 4 pages

Clearly explain and discuss the theory of comparative advantage. Given the economic benefits of trade (according to the above theory) why do some countries (give examples) attempt to restrict trade?
Throughout the following essay I am going to be explaining and discussing in detail the theory of Comparative Advantage. The theory of Comparative Advantage is one the most fundamental and unchallenged laws in economics with many benefits to the economy, and will be basing the core of the essay on this law. The theory of Comparative Advantage was initially put forward in 1817 by David Ricardo which was published in Principles of Political Economy and Taxation. Examples will be used ...view middle of the document...

Both countries are better off as they both have the products; England has cloth but also has wine at a lower price than it would have cost to produce it themselves. As a result of comparative advantage if countries do specialise in producing the product that they have a comparative advantage in then the trading of goods globally can benefit all of the countries.
In the following two examples I will illustrate and explain the theory of comparative advantages using graphical and numerical examples for coherence.
Figure [ 1 ]
Figure 1 shows the production possibility frontier (PPF) of two countries X and Y, both producing manufactured and agricultural goods. The PPF shows that both countries produce both types of goods however country Y produces a higher output of both goods. However country Y has a comparative advantage only in producing manufactured goods, this is because the opportunity cost of producing 1 manufactured good is 0.8 units of agricultural goods. In comparison the opportunity cost of country X producing manufactured goods would be 1, and so has a higher opportunity cost. Additionally country X has a comparative advantage in producing agricultural goods this is because to produce 1 unit of agricultural goods they would only have to forgo 1 unit of manufactured goods (60/60=1). In comparison country Y would have to forgo 1.25 units of manufactured goods in order to produce 1 unit of agricultural good (100/80=1.25). Hence country Y would incur a greater opportunity cost. Additionally it can be seen that country Y has a comparative advantage as the gradient of the production possibility frontier is steeper than that of country X. Consequently, after calculating the opportunity costs it would be efficient for country Y to produce manufactured goods and country X to produce the agricultural goods and then trade with each...

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