New MicrosEco exchange oft Word Microsoft Word EndNote X7 Th

New MicrosEco exchange oft Word. Microsoft Word EndNote X7 The most difficult section of this wecks readings was the section titled \"Exchange Rates and Comparative Advantage.\" The examples that were given were not very clear to me. Specifically, the idea that the countries wil1 comparative advantage will be realized. The book goes on to say that \"...the free market will drive each country to shift resources into those sectors in which it enjoys a comparative advantage. Only in a country with a comparative advantage will \'those products be competitive in world markets. Is this implying that those countries that do not have a comparative advantage will suffer because they cannot afford to import or export? I thought that the point of trade and specialization was benefit all countries, even those that do not have an advantage in production y adjust depending on the exchange rates and Can you give some idea about question? I need five more sentenc 5

Solution

When it comes to trade between two countries there are tow different kind of advantages. One is an absolute advantage and other is a comparative advantage. Let\'s take an example of two countries the USA and India. We will assume that the USA uses 10 units of labor to produce one computer and India uses 15 for the same output, apart from that the USA uses 12 Units of labor to produce 1 units of bananas India uses 15, again. Computer and bananas are the only two products in the world.

Now if we see the USA has an absolute advantage in producing both the goods. IN computer they are taking 5 workers less and in Banana, they are taking 3 labor less. So, will there be trade between both the countries? Yes, Even when India doesn\'t have any absolute advantage in any of the product they have the less absolute disadvantage in producing Banana that means in producing bananas they have a comparative advantage.

So, the USA will focus on producing all computers and India will focus more on producing more on producing Banana. As long as India is giving more than 1 unit of banana in exchange for a computer the trade will happen, less than 1? No, because the USA can produce that on their own and doesn\'t need to trade.

What you are talking above is a case where both India and USA are employing the same amount of labor to produce the same amount of product. In that case, there is no comparative advantage. That is when the exchange rates come in. If both the countries are equally productive with their labor but Indian currency rupee is weaker as compared to Dollar India will gain an advantage in exports because their products are cheaper. Countries generally manage the value of their currency to keep their exports competitive in the export market. In the same example as given above with weaker currency India can exports goods to the USA unless both the currency becomes equal after that the products will cost same in both the countries.

If you have any other doubt please put it in the comment section.