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How is trade between India and the US justified for the two commodities in the...
How is trade between India and the US justified for the two commodities in the following case?
It costs $30 to manufacture a cell phone and $25 to manufacture a garment in the US. In India, it takes $25 to manufacture a cell phone and $5 to manufacture a garment.
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The information provided shows that India has an absolute advantage in terms of manufacturing both cell phones as well as garments as it can manufacture each of them at a lower cost compared to the US. So the US benefits by importing both the commodities from India. India on the other hand stands to gain by buying cell phones from the US due to a concept called comparative advantage.
India needs $25 to manufacture a cell phone and $5 to manufacture a garment. So for each cell phone that it does not manufacture, it can utilize the funds to manufacture 5 garments. The US on the other hand requires $30 to manufacture a cell phone and $25 to manufacture a garment. It forgoes manufacturing only 30/25 or 1.2 garments for each cell phone that it manufactures.
In terms of opportunity cost one cell phone is worth 5 garments for India and 1.2 garments for the US. Therefore the US has a comparative advantage in manufacturing cell phones and India has the same in manufacturing garments.
So the US should specialize in manufacturing cell phones and India should specialize in manufacturing garments. By doing this and later trading the products they have manufactured, both the nations make economic benefits.
Posted by justaguide on December 16, 2010 at 5:35 PM (Answer #1)
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