Illustrate the Comparative advantage and terms of trade

Question

Illustrate the Comparative advantage and terms of trade?

Answer 1

The principle of comparative advantage for two countries, U.S. and Mexico, with a simplified example is in Mexico, the opportunity cost of 1 ton of soybeans is giving up 4 tons of avocados.  In the U.S., the opportunity cost of 1 ton of soybeans is 3 tons of avocados.  In other words, the comparative cost of soybeans is less in U.S. than in Mexico when the alternative is producing avocados.  Thus the U.S. should specialize in soybeans, and Mexico should specialize in avocados. If the two nations specialize according to comparative advantage, then to get the other product they must trade.  A nation has a comparative advantage in some product when it can produce that product at a lower domestic opportunity cost than can a potential trading partner.