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If two parties trade based on comparative advantage and both gain, in what range must
Chapter 3, Problem Questions for Review 3.5(choose chapter or problem)
QUESTION:
If two parties trade based on comparative advantage and both gain, in what range must the price of the trade lie?
Questions & Answers
QUESTION:
If two parties trade based on comparative advantage and both gain, in what range must the price of the trade lie?
ANSWER:Step 1 of 2
Comparative advantage theory forms the basis of modern trade. It applies the Ricardian theory of comparative advantage of nations to produce goods or services based on their opportunity cost. The product with lower opportunity cost will be specialized and traded to other countries as export. At the same time, commodities with higher opportunity costs will be imported from other countries.