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Theory of comparative costs

Plastics and Rubber Products
From Bolivia
To Gibraltar
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Munmun S.
Jun 08, 2020
What is the theory of comparative costs of international trade?

1 answer

Andrea T.
Jun 08, 2020
The Comparative cost theory is the basis of international trade.It explains that “it pays countries to specialize in the production of those goods in which they possess greater comparative advantage or the least comparative disadvantage.”Suppose a unit of productive power produces in country A, 20 tooth-brushes or 20 kg of sugar and in country B, 15 tooth-brushes or 10 kg of sugar. In this case, country A has an advantage over country B in the production of both tooth-brushes and sugar. But she has a greater ‘comparative advantage’ in the production of sugar.Country B is at a disadvantage in both commodities, but the ‘comparative disadvantage’ is less in case of tooth-brushes. Hence, A will specialize in sugar and B in tooth-brushes. This is the law of-comparative costs.
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