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Chapter 9: Problem 1

What is the difference between absolute advantage and comparative advantage? If a country has an absolute advantage in producing a good, will it always be an exporter of that good? Briefly explain.

Short Answer

Expert verified
Absolute advantage refers to the capability of producing more of a good or service with given resources, while comparative advantage refers to the ability to produce a good at a lower opportunity cost. A country will not always export a good just because it has absolute advantage in production because exports are based on comparative advantage. A country will only export goods that it can produce with the lowest opportunity cost.

Step by step solution

01

Definition of Absolute Advantage

Absolute advantage refers to the ability of a country to produce more of a particular good or service than other countries, given the same amount of resources. It's a measure of efficiency in production. For instance, if Country A can produce 5 tons of rice per hour, while Country B can only produce 3 tons of rice per hour, then Country A has an absolute advantage in producing rice.
02

Definition of Comparative Advantage

Comparative advantage points towards the ability of a country to produce a particular good or service at a lower opportunity cost than another country. Opportunity cost represents what needs to be given up in order to obtain something. For example, Country A may be able to produce both cars and bicycles more efficiently than Country B (absolute advantage in both), but the opportunity cost of producing cars is high for Country A because it could have produced a lot of bicycles instead. Therefore, it makes sense for A to specialize in bicycles (where it has a comparative advantage) and trade with B for cars.
03

Understanding the Link between Advantage and Export

If a country has an absolute advantage in the production of a particular good, it does not necessarily mean it will be an exporter of that good. The decision for a nation to export a good depends on comparative advantage rather than absolute advantage. Even if the country could produce the good more efficiently, if the opportunity cost of doing so is too high compared to other goods, they may choose to import that good and focus their resources on what they can produce with lower opportunity cost.

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Most popular questions from this chapter

Every year, the Gallup Poll asks a sample of people in the United States whether they believe foreign trade provides "an opportunity for economic growth through increased U.S. exports" or whether they believe foreign trade represents "a threat to the economy from foreign imports." The following table shows the responses for 2 years. a. Do you believe that foreign trade helps or hurts the economy? (Be sure to define what you mean by "helps" or "hurts.") b. Why might the general public's opinion of foreign trade be substantially different during an economic recession, when production and employment are falling, than during an economic expansion, when production and employment are increasing? c. Typically polls show that people in the United States under 30 years of age have a more favorable opinion of foreign trade than do people age 65 and over. Why might younger people have a more favorable view of foreign trade than older people?

An article in the New York Times quoted an economist as arguing that "global free trade and the European single market \(\ldots\) encourage countries to specialize in sectors where they enjoy comparative advantage. Germany's [comparative advantage] is in cars and machine tools." For the author's observation to be correct, must Germany be able to produce more cars and machine tools per hour worked than do France, Italy, Spain, and Germany's other trading partners? Briefly explain.

If the United States were to stop trading goods and services with other countries, which U.S. industries would be likely to see their sales decline the most? Briefly explain.

(Related to the Apply the Concept on page 312 ) In \(2016,\) an editorial in the Wall Street Journal was in favor of, "repealing the notorious catfish program that has become a byword for Washington waste and protectionism? This should be an easy call." Why would a federal government program to inspect catfish be considered an example of protectionism? If repealing the program is "an easy call," as the editorial asserts, why was the program still in place in \(2017,\) more than a year after the editorial was published?

What are the main sources of comparative advantage?
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