Question

Nire   has a comparative advantage in producing butter, whereas Nire   has a comparative advantage in producing guns.Consider a proposed trade of 12.5 pounds of butter for 20 guns.True or False: This trade would be mutually agreeable to both countries.

Answer 1

Answer:

False

Explanation:

A proposed trade of 12.5 pounds of butter for 20 guns may NOT be mutually agreeable to both countries.

The main idea of comparative advantage is NOT trade by barter but buying and selling. Comparative advantage is a principle that states that a country should produce more of the goods and services which it can produce at a lower opportunity cost than that of trade partners and thereafter sell to those partners at a lower cost than they would have produced it themselves in the bid to be self reliant.

It is difficult to agree to such a deal of 12.5 pounds of butter for 20 guns because it is impossible to conclude that they are even or equal in value. The both countries should sell to each other as money is a common means of exchange.