Answer to Question #99529 in Microeconomics for Ev

Question

The theory of Comparative Advantage in production and trade specifies that countries should engage in the production of goods and services for which they have a comparative advantage or lower opportunity cost than others. Do you think this theory can be effectively applied even where there is a wide technological or developmental gap between two countries?

Answer 1

Trading-partners reap mutual gains when each nation specializes in goods for which it holds a comparative advantage and then engages in trade for other products. Each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations. Technological difference and development gaps between countries should not hinder trade in such a case.