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Analysis

5.04 Why Do Countries Trade?

A.

The United States has an absolute advantage when compared to both Romania and South Africa. As it takes less worker hours to produce each resource. This is most likely due to the abundant amount of resources the US has when compared to the countries in these specific resources.

B.

The United States also has a comparative advantage over South Africa, as it takes less additional workers hours to produce each resource. For example, it only takes (2) additional worker hours in order to produce corn and citrus, while it takes double that (4) for South Africa.

C.

C. Most trade happens because of comparative advantage; this is due to the fact that some countries produce faster and more cost efficiently than others. Naturally the country with higher efficiency in a specific resourse will then specialize respectively. This is what trade depends on. This also benefits each country within the trade agreement, especially if both countries produce what the other needs. For example, since Ecuador has a higher comparative advantage in crude oil production than that of the US, in order to maximize efficiency it would be of benefit to both parties if a trade agreement was made.

Romania

Developing Country

Number of additional worker hours to produce one unit of citrus instead of one unit of corn

Corn

Citrus

8

10

Equal comparative advantage

to United States

Number of additional worker hours to produce one unit of citrus instead of one unit of corn

Computer Software

Apparel

United States of America

Developed country

Equal comparative advantage

to United States

6

8

Citrus

Corn

Number of additional worker hours to produce one unit of citrus instead of one unit of corn

4

2

Higher comparative advantage

Number of additional worker hours to produce one unit of computer software instead of one unit apparel

Computer Software

Apparel

2

4

Equal comparative advantage

to Romania.

South Africa

Developing Country

Number of additional worker hours to produce one unit of citrus instead of one unit of corn

Corn

Citrus

10

6

Higher comparative advantage

Number of additional worker hours to produce one unit of computer software instead of one unit of apparel.

Apparel

Computer Software

4

12

Higher comparative advantage

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