GOALSBy the end of this section, you will be able to: Show
Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations.KEY Points
Terms
In the drive for international trade, it is important to understand how trade affects countries positively and negatively—both how a country’s imports and exports affect its economy and how effectively the country’s ability to create and exportvital goods effects the businesses within that country. Absolute advantage and balance of trade are two important aspects of international trade that affect countries and organizations . European Free Trade Agreement The European Free Trade Agreement has helped countries international trade without worrying about absolute advantage and increases net exports.Absolute AdvantageIn economics, the principle of absolute advantage refers to the ability of a party (an individual, a firm, or a country) to produce more of a good or service than competitors while using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productivities, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party. It can be contrasted with the concept of comparative advantage, which refers to the ability to produce a particular good at a lower opportunity cost. Balance of TradeThe balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports in an economy over a certain period. A positive balance is known as a trade surplus if it consists ofexporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance. GLOSSARYBalance of trade The difference between the monetary value of exports and imports in an economy over a certain period of time. Comparative advantage The ability of a party to produce a particular good or service at a lower marginal and opportunity cost over another. The concept that a certain good can be produced more efficiently than others due to a number of factors, including productive skills, climate, natural resource availability, and so forth. Economy Collective focus of the study of money, currency and trade, and the efficient use of resources.The system of production and distribution and consumption. The overall measure of a currency system; as the national economy. Export To sell (goods) to a foreign country. Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Exporting The act of selling to a foreign country the sale of capital, goods, and services across international borders or territories. Good An object produced for market. Input Something fed into a process with the intention of it shaping or affecting the outputs of that process. Each participant’s contributions that are viewed as entitling him/her to rewards or costs. Examples include time, effort, and loyalty. Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative. The cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). The value forfeited by taking a particular route. Output Production; quantity produced, created, or completed. data sent out of the computer, as to output device such as a monitor or printer. Productivity Productivity is a measure of the efficiency of production and is defined as total output per one unit of a total input. The rate at which goods or services are produced by a standard population of workers. A ratio of production output to what is required to produce it (inputs). The state of being productive, fertile, or efficient. The rate at which products and services are produced relative to a particular workforce. Resource Something that one uses to achieve an objective, e.g. raw materials or personnel. Services That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work. Trade deficit A negative balance of trade. Trade surplus A positive balance of trade. Value The degree of importance given to something. A value is extremely absolute or relative ethical value, the assumption of which can be the basis for ethical action. A customer’s perception of relative price (the cost to own and use) and performance (quality) Values A collection of guiding principles; what one deems to be correct and desirable in life, especially regarding personal conduct. What is a country's ability to produce more of a given product compared to another country?Comparative Advantage – a country's ability to produce a given product relatively more efficiently than another country – or – production at a lower opportunity cost.
When countries depend on each other for products it's called?Economic interdependence is a system by which many companies and nations are economically dependent upon each other. We've learned that it's a product of labor specialization, which is when so many products are produced in one nation that jobs become more specialized and economic interdependence is bound to form.
Is a product or service a country sells to another country?Exports are goods and services that are produced in one country and sold to buyers in another. Exports, along with imports, make up international trade.
When a nation has a comparative advantage in some product this means that?A comparative advantage exists when a country can produce goods at a lower opportunity cost compared to other countries.
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Is a countrys ability to produce more of a given product than can another country
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