Econ Yr 2 HW 1

Econ Yr 2 HW 1 - Eco IBHL2 Gaith Kalai Homework #1 Page...

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Eco IBHL2 Gaith Kalai Homework #1 Page 326; 1+2 • How does specialization allow countries to benefit from trade? • Explain the theory of comparative advantage. 1+2. One of the prime benefits of free trade is that it allows specialization of labor given an amount of scarce resources in a given economy. This increased specialization allows nations to achieve more output (exports), more capital in the system (from the profit made off of the exports) and thus higher levels of consumption. And since one man’s spending is another man’s income, it increases real income and savings, which in turn makes domestic funds for investment more available. Like the division of labor, specialization generally comes about because it is discovered (usually by trial and error) that the individuals or groups concerned can increase their productivity (and hence, under a market economy, their incomes) through greater specialization according to the principle of comparative advantage. Specialization in a globalization context means that countries specialize in the work they can do at the lowest opportunity cost. This brings a controversial point that nations should not always do
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This document was uploaded on 10/26/2011 for the course PLIR 2050 at UVA.

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Econ Yr 2 HW 1 - Eco IBHL2 Gaith Kalai Homework #1 Page...

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