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Chapter 9: Problem 2

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
The difference between absolute and comparative advantage lies in efficiency and opportunity cost. Absolute advantage refers to the ability to produce more of a good or service with the same amount of resources, whereas comparative advantage relates to the ability to produce a good or service at a lower opportunity cost. A country with an absolute advantage might not always be an exporter of that good because it would only export goods in which it has a comparative advantage due to lower opportunity cost.

Step by step solution

01

Definition of Absolute Advantage

Absolute advantage is when a country can produce a good or service more efficiently (i.e. using fewer resources) than another country. That is, the country produces more output per unit of input compared to other countries.
02

Definition of Comparative Advantage

Comparative advantage, on the other hand, is when a country can produce a good or service at a lower opportunity cost than other countries. It can be beneficial for a country to specialize in producing the goods and services where it has a comparative advantage and trading for others.
03

Relationship between Absolute Advantage and Comparative Advantage with Exports

Having an absolute advantage in producing a good does not necessarily mean a country will be the exporter of that good. A country will export goods where they have a comparative advantage due to the lower opportunity cost. For instance, it is possible for a country to have an absolute advantage in producing both goods A and B, but only have a comparative advantage in producing good A. In this case, the country should specialize in producing good A and import good B, even if it has an absolute advantage in producing both.

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Most popular questions from this chapter

Briefly explain how international trade increases a country's consumption.

An article in the New Yorker stated, "The main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. But ... the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries." Explain how it is possible that middle-and lower-income Americans are both the biggest losers and at the same time the biggest winners from free trade.

A political commentator makes the following statement: The idea that international trade should be based on the comparative advantage of each country is fine for rich countries like the United States and Japan. Rich countries have educated workers and large quantities of machinery and equipment. These advantages allow them to produce every product more efficiently than poor countries can. Poor countries like Kenya and Uruguay have nothing to gain from international trade based on comparative advantage. Do you agree with this argument? Briefly explain.

Hal Varian, chief economist at Google, made the following two observations about international trade: 1\. Trade allows a country "to produce more with less." 2\. "There is little doubt who wins [from trade] in the long run: consumers." Briefly explain whether you agree with either or both of these observations.

The United States produces beef and also imports beef from other countries. a. Draw a graph showing the demand and supply of beef in the United States. Assume that the United States can import as much as it wants at the world price of beef without causing the world price of beef to increase. Be sure to indicate on your graph the quantity of beef imported. Assume that the world price of beef is lower than the U.S. price. b. Now show on your graph the effect of the United States imposing a tariff on beef. Be sure to indicate on your graph the quantity of beef sold by U.S. producers before and after the tariff is imposed, the quantity of beef imported before and after the tariff, and the price of beef in the United States before and after the tariff. c. Discuss who benefits and who loses when the United States imposes a tariff on beef.
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