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Unformatted text preview: Eco IBHL 2 Gaith Kalai HW #2 Page 333; 4+5 According to the theory of comparative advantage, under what circumstances is it not worthwhile for countries to specialize in trade? Discuss some of the weaknesses of the theory of comparative advantage. Firstly, according to the theory of comparative advantage, if two countries face the same opportunity costs for the two goods in question (ie. wine and cheese), then neither of them could produce the goods at a cheaper price; therefore there is no country that has a comparative advantage in the production of one good. Since the whole point of comparative advantage is to minimize costs (incl. opportunity costs) for specialization to occur, both countries trading identical goods produced with the same opportunity costs is pointless. This graph shows two countries producing two goods at identical opportunity costs. Having highlighted the areas where comparative advantage would be null, lets outline some of the limitations the theory retains in describing trade between two countries trading two different goods: One of the biggest assumptions the theory assumes is that the trade taking place is within a...
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This document was uploaded on 10/26/2011 for the course PLIR 2050 at UVA.
- Fall '11