This pupil illustrates the rules of absolute and comparative advantage by utilizing the United States and China involved in a conjectural investing state of affairs. Let ‘s state both states are engaged in bring forthing plaything for kids. The United States possess high technological installations and has considerable stuff needed to bring forth playthings ( such as plastics and metals ) . We can state that it possess absolute advantages in bring forthing plaything because of these facets. However, China has a immense work force force which has lower labour costs and hence can bring forth more playthings in shorter period of clip. In add-on, there is small difference between China and U.S. in technological quality and natural stuff needed. In footings of work force, China has a comparative advantage. By deduction, an American company bring forthing playthings will profit if it invests in China since there is small differences in technological progresss and handiness of natural stuff, and that China has comparative advantage in labour costs. The Chinese will profit from American investing since they can get know-how on engineering and stuffs from the American investors.
This pupil thinks that authorities engagement in the economic system is needed if the economic system showed marks of continued lag, similar to what is being experienced right now. If the unemployment rates increase, involvement rates continue to travel up, debts continue to stack, and many houses file for bankruptcy protection, so it is incumbent upon the authorities to implement steps curtailing fiscal minutess for the good of economic system. However, the research worker is of the sentiment that authorities engagement is merely necessary if the economic conditions have non been improved even by competition and other market mechanism. The pupil thinks that one time an economic system improves, so it is clip for the authorities to cut down its engagement and merely proctor from a distance. An economic system will work best if the authorities allows market participants to act upon.