According to the principle of comparative advantage:

 Options:

a. South Korea should export steel b. South Korea should export steel and DVDs c. Japan should export steel d. Japan should export steel and DVDs

The Correct Answer Is:

• a. South Korea should export steel

The principle of comparative advantage, a fundamental concept in international trade theory, is crucial for determining which goods or services a country should specialize in and export.

In this context, the correct answer is option (a): “South Korea should export steel.” To understand why this is the correct answer, let’s delve into the principle of comparative advantage and then explain why the other options are not correct.

Explanation of the Correct Answer (Option a):

The principle of comparative advantage, as articulated by the economist David Ricardo, suggests that countries should specialize in the production of goods or services in which they have a comparative advantage. A comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country.

In the case of South Korea, if it can produce steel at a lower opportunity cost than other goods, it should specialize in steel production and export it. This is because by doing so, South Korea can benefit from trade with other countries, where they might have a comparative advantage in the production of different goods or services.

In essence, South Korea’s resources and labor are more efficiently employed in steel production, which allows them to trade this surplus for other goods or services that they do not produce as efficiently.

Now, let’s explain why the other options are not correct:

b. South Korea should export steel and DVDs:

This option is not necessarily correct under the principle of comparative advantage because it assumes that South Korea has a comparative advantage in both steel and DVDs. However, the principle of comparative advantage suggests that a country should specialize in the production of the good in which it has the lowest opportunity cost compared to other countries.

It doesn’t mean that South Korea can’t produce DVDs, but if producing steel offers a greater advantage in terms of lower opportunity cost, it makes sense for South Korea to specialize in steel production.

c. Japan should export steel:

This option is not correct because it doesn’t consider the principle of comparative advantage for Japan. If Japan has a comparative advantage in steel production, it should specialize in this area. However, the principle of comparative advantage doesn’t inherently dictate that Japan should specialize in steel without considering the opportunity costs of other goods or services it could produce.

d. Japan should export steel and DVDs:

Similar to option (c), this option is not necessarily correct for Japan. It assumes that Japan has a comparative advantage in both steel and DVDs. While Japan is known for its high-quality steel and electronics production, the principle of comparative advantage requires a more nuanced analysis of opportunity costs to determine the optimal specialization.

Japan might indeed have a comparative advantage in one of these industries, but not necessarily in both.

The key takeaway from the principle of comparative advantage is that countries should specialize in the production of goods or services where they have a comparative advantage, as determined by their opportunity costs.

This specialization leads to greater overall efficiency and benefits through international trade, allowing countries to acquire goods they do not produce as efficiently from trading partners.

The specific goods in which a country has a comparative advantage can vary based on factors such as technological expertise, resource availability, and workforce skills.

In summary, the principle of comparative advantage provides a framework for countries to make informed decisions about which goods or services to produce and export. It suggests that they should focus on what they can produce with the lowest opportunity cost, which may not necessarily mean exporting all goods in which they are capable of producing.

Option (a) correctly applies this principle by suggesting that South Korea should export steel, as long as it has a comparative advantage in steel production based on opportunity cost considerations.

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