Question

What is the law of comparative advantage? According to the law of comparative advantage, what should be the distinguishing characteristics of the goods a nation produces? What should be the distinguishing characteristics of the goods a nation imports? How will international trade influence people's production levels and living standards? Explain.

Answer 1

Answer:

Its the ability of a nation to produce a good or a service at the lowest opportunity cost.

Explanation:

According to the law of comparative advantage, a nation should produce only a good or a service if the opportunity of cost of producing it is among the lowest among its trade partners. It will give a nation or a company to sell the goods at the lowest possible prices and therefore gathering the maximum economic growth.

This law will allow people to specialize in certain skills therefore reducing the cost of production in the long run, therefore increasing the economic gains. Similarly, a nation should import goods, if the opportunity cost of producing that good is higher than partner nations. Thus, the international trade will allow people to specialize in their areas of expertise and increase their productivity over time. Therefore, the overall global economic output will increase, increasing the people's standards of living.