What is absolute advantage in
What is absolute advantage in trade theory?
What is the comparative advantage on international trade?
How does absolute and comparative advantage lead tospecialization?
What are the benefits of comparative advantage?
Calculations:
The following represents the production possibilities in thefollowing two countries.
|
Canada Mexico |
|||
|
Good X |
Good Y |
Good X |
Good Y |
|
0 |
32 |
0 |
24 |
|
4 |
24 |
4 |
18 |
|
8 |
16 |
8 |
12 |
|
12 |
8 |
12 |
6 |
|
16 |
0 |
16 |
0 |
(a) Which country has a comparative advantage at producing Good X?
(b) How can you tell? (Hint: opportunity cost)
(c) Which country has a comparative advantage at producing Good Y?
(d) Indicate how both countries can gain from trade?
Use the following data to answer the following questions: UntiedStates can produce either 18 oranges or 9 apples in an hour,whereas, Mexico can produce either 16 oranges or 4 apples in anhour.
2. What are theopportunity costs of producing 1 apple for United States and Mexicorespectively?
3. What arethe terms of trade between apples and oranges that would allow bothUntied States and Mexico to gain by specialization andexchange?
Answer:
Solution
A country / firm is said to have an absolute advantage in tradeif it is able to produce a more number of goods /amount of servicethan it’s competitors / peers by utilizing the same amount ofresources.
A country / firm is said to have an comparitive advantage intrade if it is able to a produce a good / render a service at alower opportunity cost than it’s competitors / peers.
In case of absolute advantage,since the country / firm has thelowest cost per unit,the demand for it’s goods / service will behigh,so it will start focussing and will produce more of that good/ service.So,it specializes in producing that.In lon-run also itwill improve due to reasons like learning curve,economic scale ofproduction,increasing rate of return etc.,
In case of comparitive advantage,the country /firm will decideto produce the good/service if it has lower opportunity cost whencompared to its competitors.
So,it’s specialization will depend on more of it’s relativeperformance with it’s peers rather than it’s own performance.
Both lead to specialization as they focus on more wealthmaximization
(a) Canada has a comparitive advantage inproducing a Good X
(b) The opportunity cost of producing good X is lower for Canadathan Mexico .It can be seen that Canada needs to sacrifice 4 unitsof Good X inorder to produce 8 additional units of Good Y.ButMexico needs to sacrifice 4 units of Good X inorder to produce only6 additional units of Good Y
(c) Mexico has a comparative advantage at producing Good Y
(d)Both countries can specilixe in producing the Goods they havecomparitivev advantage.Canada can choose to specialize in producingGood X only and Mexico in producing the Good Y
2.The opportunity cost of producing 1 apple for United States isto sacrifice the production of 2 oranges.and the opportunity costof producing 1 apple for Mexico is to sacrifice the production of 4oranges.
3.The U.S must produce more of apples and Mexico must producemore of oranges.The terms of exchange can 1 apple for 3 oranges.soboth the countries will benefit.
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