the gains from trade resulting from comparative advantage of nations

comparative advantage in a single primary commodity comparative advantage can lead countries to specialize in exporting primary goods and raw materials that TRAP THEM IN LOW-WAGE ECONOMICES BUT competitive advantage attempts to correct for this issue by stressing maximizing scale of economies in goods and services that garner premium prices To produce one additional barrel of oil in Canada has an opportunity cost of 2 lumber. It answers the question, “How many inputs do I need to produce shoes in Mexico?” Comparative advantage asks this same question slightly differently. The mercantilists contended that because one nation’s gains from trade come the expense of its trading partners, not all nations could simultaneously realize gains from trade. If the United States can export no more than 6,000 refrigerators in exchange for imports of at least 1,500 pairs of shoes, it will be able to consume more of both goods and will be unambiguously better off. The advantages of specialization, and the resulting gains from trade, were the start-ing point for Adam Smith’s 1776 book The Wealth of Nations,which many regard as the beginning of economics as a discipline. The theory of comparative advantage teaches us that nations should ... it is possible to gain from trading. Who has the absolute advantage in the production of oil or lumber? {�h-��О('0~k��D��x�;�d��tހV*p+��nPpL�{������DG:�q�:�PY��\mc��Kg���^χ����1d��2���[email protected]%Q:�=2���t��]�=���%�qB�#�[�?�^��7V�� �:�훹kk&��c2�ّU]�퍐NM�Ϣ+c�/�z+eqk��������Ƣb���*5or%Ә]��%z�dA�\����P� �r�%L�O%�*"�j^��eL1���aH���v�=��b�XN��s%[L�D�j��� �C=�X�}%R ���k.��quC�M�U4��#*�,)�Sn�*  Gain from trade depends on the comparative cost conditions. Because 1/2 lumber < 2 lumber, Venezuela has the comparative advantage in producing oil. Divide both sides of the equation by 60. Countries are better off if they specialize in producing the goods for which they have a comparative advantage. Point B is where they end up after trade. They benefit from est rates, exchange rates, and economies of scale are havingstrongdomesticrivals,aggressivehome-based the most potent determinants of competitiveness. Instead of comparing how many workers it takes to produce a good, it asks, “How much am I giving up to produce this good in this country?” Another way of looking at this is that comparative advantage identifies the good for which the producer’s absolute advantage is relatively larger, or where the producer’s absolute productivity disadvantage is relatively smaller. Did you have an idea for improving this content? To calculate absolute advantage, look at the larger of the numbers for each product. When you first met the production possibility frontier (PPF) in an earlier module, it was drawn with an outward-bending shape. „The idea that nations benefit from trade has nothing to do with whether a country has an absolute advantage in producing a particular good. Gains from trade are fueled by differences in preferences only. Step 6. Increased saving and investment resulting in economic growth c. Increased competition resulting in lower prices and wider range of output d. Increasing comparative advantage leading to specialization ANS: D PTS: 1 DIF: Moderate NAT: BPROG: … Ricardo considered what goods and services countries should produce, and suggested that they should specialise by allocating their scarce resources to produce goods and services for which they have a comparative cost advantage. The theory of comparative advantage explains why countries trade: they have different comparative advantages. Comparative advantage describes the economic reality of the work gains from trade for individuals, firms, or nations, which arise from differences in their factor endowments or technological progress. Trade allows each country to take advantage of lower opportunity costs in the other country. The linear production possibilities frontier is a less realistic model, but a straight line simplifies calculations. The classical economists utilized three methods in dealing with the question of the gains from trade: (1) the doctrine of comparative costs; (2) the increase in income as a criterion of gain; and (3) the terms of trade as an index of the gains from trade and its distribution. In Canada, 40 lumber is equivalent in labor time to 20 barrels of oil: 40 lumber = 20 oil. B. The opportunity cost of one lumber is 1/2 oil. The United States will export refrigerators and in return import shoes. Watch this video to review the ways that comparative advantage benefits all the parties involved. Comparative Advantage in Production: Nations like individuals maximise their poten­tial well-being and consumption by producing goods and services that they are especially well- suited to produce. For additional practice and review using numbers, watch this video from ACDC economics. Comparative advantage exists when a country has lower opportunity cost, i.e., it gives up less of one product to obtain more of another product. Efficient Employment of Resources: The direct dynamic gains from foreign trade are that comparative advantage leads to a more efficient employment of the productive resources of the world. Let’s say that, in the situation before trade, each nation prefers to produce a combination of shoes and refrigerators that is shown at point A. The concept of comparative advantage suggests that as long as two countries (or individuals) have different opportunity costs for producing similar goods, they can profit from specialization and trade. Divide both sides of the equation by 20 to calculate the opportunity cost of one barrel of oil in Canada. In what product should Canada specialize? One oil in Venezuela has an opportunity cost of 1/2 lumber. With the same labor time, Canada can produce either 20 barrels of oil or 40 tons of lumber. 1 oil = 2 lumber. The idea of comparative costs advantage is drawn in view of deficiencies observed by Ricardo in Adam Smith’s principles of absolute cost advantage in explaining territorial specialisation as a basis for international trade. If a country has an absolute advantage in producing both goods, it has higher labor productivity in both and its workers will earn higher incomes than those in the other country. In this example, is absolute advantage the same as comparative advantage, or not? Comparative advantage is the ability of an​ individual, a​ firm, or a country to produce a good or service at a lower opportunity cost than competitors. Canada has the absolute and comparative advantage in lumber; Venezuela has the absolute and comparative advantage in oil. For example, a trade where the U.S. exports 4,000 refrigerators to Mexico in exchange for 1,800 pairs of shoes would benefit both sides, in the sense that both countries would be able to consume more of both goods than in a world without trade. Mexico started out, before specialization and trade, producing 4,000 pairs of shoes and 5,000 refrigerators. In what product should Venezuela specialize? T F 4. It is not possible for an individual or country to have a comparative advantage in all goods. These goods are homogeneous, meaning that consumers/producers cannot differentiate between corn or oil from either country. International trade - International trade - Simplified theory of comparative advantage: For clarity of exposition, the theory of comparative advantage is usually first outlined as though only two countries and only two commodities were involved, although the principles are by no means limited to such cases. %PDF-1.3 In our example above, for country A, every extra unit of good Y produced involves an … According to Adam Smith, trade between two nations is based on absolute advantage. 2. In Canada a worker can produce 20 barrels of oil or 40 tons of lumber. David Ricardo in 1817 first clearly stated and proved the principle of comparative advantage, termed a "fundamental analytical explanation" for the source of gains from trade. The United States has an absolute advantage in producing both shoes and refrigerators; that is, it takes fewer workers in the United States than in Mexico to produce both a given number of shoes and a given number of refrigerators. %�쏢 Figure 1. The following feature shows how to calculate absolute and comparative advantage and the way to apply them to a country’s production. comparative advantage is the key to determining specialization and trade. Comparative advantage is a term associated with 19th Century English economist David Ricardo. c. both nations can benefit from trade. Adam Smith University of Glasgow, Oxford, back to Glasgow. As a result, U.S. production of shoes decreases by 1,500 units (6/4 × 1,000), while its production of refrigerators increases by 6,000 (that is, 6/1 × 1,000). Absolute advantage is the ability of a country to produce more of a good than other countries using the same amount of resources. Trade provide an opportunity for the small country to specialise in the production of those commodities in which it has comparative advantage and … Step 4. So in effect, 20 barrels of oil is equivalent to 40 tons of lumber: 20 oil = 40 lumber. Production Possibility Frontiers. According to the mercantilists: A) Only one nation can gain from trade, and it is at the expense of other nations.

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