A country has ~ in production of a g/s if it can produce it using fewer resources & at a lower cost than another country,
- 2 countries-2 guds model
1. Production & opportunity cost r constant for each product.
- A country is said to have ~ in production of a gud if it can produce more of gud than another country having same amount of resources.
- This country is more efficient in production of that gud.
- Country will specialise in production of gud for which it has an ~.
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Principles of International Trade
- Trade occurs when countries have a clear-cut/absolute advantage over other countries.
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- Even though a country may have absolute advantage in production of both guds, trade can still be mutually beneficial when countries specialise based on principle of ~.
- A country has ~ if it can produce gud at a lower opportunity cost.
- Multi-lateral free trade is beneficial for overall well-being of world economy.
- It ensures that guds r produced in those countries that r most efficient, hence, minimising waste of resources,
- Restrictions on trade will reduce gains from free trade.
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Assumptions of Principles
- PPFs r linear,
- Exchange rates must be within respective domestic opportunity cost ratios. Greater difference btw opportunity costs, greater potential for trade.
- No transport costs r charged.
- 2-country, 2-guds assumption is unrealistic.
- Production costs r unlikely to be constant. As countries specialise, they benefit from economies of scale.
- No restrictions on free trade
- Resources r mobile
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