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Explain The Ricardo's Before And After Trade Comparative Advantage?

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    Start by examining before trade that what occurs in the absence of any international trade, say, because all trade is illegal or because of a prohibitive tariff. The real wage of the American worker for an hour's work as 1 unit of food or ½ unit of clothing. The European worker earns only 1/3 unit of food or ¼ unit of clothing per hour of work.

    Now suppose that all tariffs are repealed and free trade is allowed. For simplicity, further assume that there are no transportation costs. What is the flow of goods when trade is opened up? Clothing is relatively more expensive in America, and food is relatively more expensive in Europe.
    Given these relative prices, and with no tariffs or transportation costs, food will soon be shipped from America to Europe and clothing from Europe to America.
    As Europe clothing penetrates the American market, American clothiers will find prices falling and profits shrinking, and they will begin to shut down their factories. By contrast, European farmers will find that the prices of foodstuffs being to fall when American products hit the European markets; they will suffer losses, some will go bankrupt, and resources will be withdrawn from framing.
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    Mcdormit 

    answered 3 years ago

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