Chapter 2: Problem 11

With a given level of world resources, international trade may bring about an increase in total world output. Explain.

Short Answer

Expert verified

International trade can increase total world output by allowing countries to specialize in and produce those goods and services they are the most efficient at (either through absolute or comparative advantage), leading to overall increased production.

Step by step solution

Understanding the basic concept of international trade

International trade refers to the exchange of goods and services across different countries. It allows countries to focus on the production of those goods and services which they are most suited to produce, both in terms of resources and technology, and trade for those goods and services which other countries are more efficient at producing.

Explaining 'Absolute Advantage'

The theory of 'Absolute Advantage' refers to the ability of a country to produce a certain good more efficiently than other nations. If one country is absolutely more efficient in the production of all goods than another, then it can benefit by exporting the goods for which it has a larger absolute advantage, and importing goods for which its absolute advantage is smaller.

Explaining 'Comparative Advantage'

The theory of 'Comparative Advantage' extends the theory of absolute advantage. It says that even if one country is less efficient than another in the production of all goods, there can still be mutual benefit from trading. This is because each country should specialize in making the goods where it has a lower opportunity cost and then trade for other goods. These efficiencies in production can lead to a potential increase in global output.

Increase in total world output

By each country specializing in and producing the goods and services they are more efficient at (either due to absolute advantage or comparative advantage), and then trading, more goods and services can be produced and consumed than if each country tried to produce everything itself.

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