A friend tells you the following: "Free trade sounds good, but a country like Honduras doesn't haveany comparative advantage compared to the U. S." Explain to your friend what comparative advantage means, and the error in his thinking.

Question

Jay Dickson

Business

4 January, 06:23

A friend tells you the following: "Free trade sounds good, but a country like Honduras doesn't haveany comparative advantage compared to the U. S." Explain to your friend what comparative advantage means, and the error in his thinking.

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Answers (1)

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Alma Conway · Answer 1

A Nation will have comparative advantage in which it has less opportunity cost.

Explanation:

When Honduras trade with US and US has comparative advantage in one good than it is always true that Honduras will have comparative advantage in other good.

Thus your friend is wrong and according the Ricardo theory, both country will have comparative advantage in one good and both can be made better off by trading