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Chapter 33: Q. 12. (page 803)

How does comparative advantage lead to gains from trade?

Short Answer

Expert verified

Due to exchange opportunities and higher total output and level of consumption, comparative advantage lead to gain from trade.

Step by step solution

01

Step 1. Meaning of comparative advantage.

It is an economy's ability to produce a particular good or services at a lower opportunity cost than its trading partners. Basically, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.

02

Step 2. Following are the ways by which comparative advantage lead to gains from trade, these are:-

a) Due to this comparative advantage, this lead to results in exchange opportunities that lead to consumption opportunities beyond the PPC.

b) Due to the trade between two countries or agents, it allows the countries to enjoy a higher total output and level of consumption than what would have been possible domestically.

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Most popular questions from this chapter

Why might a low-income country put up barriers to trade, such as tariffs on imports?

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Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain

What is splitting up the value chain?

Why might intra-industry trade seem surprising from the point of view of comparative advantage?
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