Why Nations Trade

Why Nations Trade - WHY DO NATIONS TRADE? The Theories of...

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WHY DO NATIONS TRADE? The Theories of Absolute & Comparative Advantage
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Theories of Trade Mercantilism. Adam smith’s theory of absolute advantage. David Ricardo’s theory of comparative advantage.
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Example Problem Labor Hours for Labor Hours for 1 Wine Bottle 1 Kg of Cheese Total Labor No Trade Consumption Vintland Vintland 15 hours 10 hours 30m hours 1.5 m kgs Moonited Moonited 10 hours 4 hours 20m hours 3m kgs Which country has an absolute advantage in Wine? In Cheese? Answer: Moonited has absolute advantage in both.
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b. Which country has a comparative advantage in Wine? In Cheese? In V, Opportunity cost of wine bottle is 15/10 = 1.5 kgs of cheese In MR, Opportunity cost of wine bottle is 10/4 = 2.5 kgs of cheese Bottle of wine is cheaper in V V has comparative advantage in Wine MR has comparative advantage in Cheese. Alternatively, In V it takes 1.5 times as longer to produce a bottle of Wine compared to MR (15/10) whereas it takes 2.5 times as long to
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This note was uploaded on 11/07/2010 for the course ECON 0001 taught by Professor Kitsikopoulos during the Spring '08 term at NYU.

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Why Nations Trade - WHY DO NATIONS TRADE? The Theories of...

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