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INTERNATIONAL TRADE (ASSUMPTIONS (1) Only two countries are involved in…
INTERNATIONAL TRADE
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Comparative Advantage
The Law of Comparative Advantage states that trade can benefit all countries if they specialize in the goods that they have a comparative advantage in and can produce at a lower opportunity cost than another country.
DEFINITION: A country has a comparative advantage in the production of a good when it is able to produce the good at a lower opportunity cost than another country.
LIMITATIONS
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2) Transport Cost
a) High transport cost between two countries may deter trade from occurring even with comparative advantage.
b) Transport costs may be so high such that it is cheaper to produce domestically despite the comparative advantage
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4) Factor Immobility
a) Factors of production may not be able to move freely between industries and thus hinders trade and the development of a comparative advantage
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ASSUMPTIONS
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5) Perfect factor mobility within each country, and full employment of resources.
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