19.1 Absolute and Comparative Advantage A country has an absolute advantage in
those products in which it has a productivity edge over other countries; it takes fewer resources to produce a product. A country has a comparative advantage when it can produce a good at a lower cost in terms of other goods. Countries that specialize based on comparative advantage gain from trade. 19.2 What Happens When a
Country Has an Absolute Advantage in All Goods Even when a country has high levels of productivity in all goods, it can still benefit from trade. Gains from trade come about as a result of comparative advantage. By specializing in a good that it gives up the least to produce, a country can produce more and offer that additional output for sale. If other countries specialize in the area of their comparative advantage as well and trade, the highly productive
country is able to benefit from a lower opportunity cost of production in other countries. 19.3 Intra-industry Trade between Similar Economies A large share of global trade happens between high-income economies that are quite similar in having well-educated workers and advanced technology. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. In the case of intra-industry trade between economies with similar income levels, the gains from trade come from specialized learning in very particular tasks and from economies of
scale. Splitting up the value chain means that several stages of producing a good take place in different countries around the world. 19.4 The Benefits of Reducing Barriers to
International Trade Tariffs are placed on imported goods as a way of protecting sensitive industries, for humanitarian reasons, and for protection against dumping. Traditionally, tariffs were used as a political tool to protect certain vested economic, social, and cultural interests. The WTO has been, and continues to be, a way for nations to meet and negotiate in order to reduce barriers to trade. The gains of international trade are very large, especially for smaller countries, but are beneficial to all. Questions1. True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. Explain. 2. Brazil can produce 100 pounds of beef or 10 autos. In contrast the United States can produce 40 pounds of beef or 30 autos. Which country has the absolute advantage in beef? Which country has the absolute advantage in producing autos? What is the opportunity cost of producing one pound of beef in Brazil? What is the opportunity cost of producing one pound of beef in the United States? 4. In Germany it takes three workers to make one television and four workers to make one video camera. In Poland it takes six workers to make one television and 12 workers to make one video camera.
5. How can there be any economic gains for a country from both importing and exporting the same good, like cars? 6. Table \(\PageIndex{1}\) shows how the average costs of production for semiconductors (the “chips” in computer memories) change as the quantity of semiconductors built at that factory increases.
Table \(\PageIndex{1}\) 7. If the removal of trade barriers is so beneficial to international economic growth, why would a nation continue to restrict trade on some imported or exported products? 8. What is absolute advantage? What is comparative advantage? 9. Under what conditions does comparative advantage lead to gains from trade? 11. Is it possible to have a comparative advantage in the production of a good but not to have an absolute advantage? Explain. 13. What is intra-industry trade? 15. What is splitting up the value chain? 16. Are the gains from international trade more likely to be relatively more important to large or small countries? 17. Are differences in geography behind the differences in absolute advantages? 18. Why does the United States not have an absolute advantage in coffee? 20. You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond? 22. You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem? 24. Do consumers benefit from intra-industry trade? 25. Why might intra-industry trade seem surprising from the point of view of comparative advantage?26. In World Trade Organization meetings, what do you think low-income countries lobby for? 28. Can a nation’s comparative advantage change over time? What factors would make it change? 29. France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.
30. In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.
31. Review the numbers for Canada and Venezuela from Table 19.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.
32. In Exercise 19.31, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada? 34. Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of $10 per phone and South Korea can produce 50 million mobile phones at $5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade? When a country can produce a good at a lower cost in terms of other goods?A comparative advantage exists when a country can produce goods at a lower opportunity cost compared to other countries.
When a country can produce a product cheaper than other countries?The theory of comparative advantage holds that even if one nation can produce all goods more cheaply than can another nation, both nations can still trade under conditions where each benefits. Under this theory, what matters is relative efficiency.
When a country can create products at a lower cost than other countries this is an advantage?Absolute advantage exists when a country can produce a good or service at a lower cost than other countries.
When it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product?A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product. The United States, for example, has an absolute advantage in reusable spacecraft and other high-tech items.
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