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Chapter 33: Q. 8. (page 803)

What is absolute advantage? What is comparative advantage?

Short Answer

Expert verified

Both absolute and comparative advantage defines the efficiency of the firms, countries or individual for the reduction of the prices of goods and services.

Step by step solution

01

Step 1. Principle of Absolute advantage meaning.

It is the ability of a party or individual or firms or country to produce a good or service more efficiently than its competitors. The Scottish economist Adam Smith first describe the principle of absolute advantage in the context of international trade in 1776, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness.

02

Step 2. Meaning of comparative advantage.

An economy's ability to produce a particular good or service at a lower opportunity cost then its trading partners. Comparative advantage is used to explain why companies, countries, or individual can benefit from trade. Basically, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.

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Most popular questions from this chapter

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.

Are the gains from international trade more likely to be relatively more important to large or small countries?

Does intra-industry trade contradict the theory of comparative advantage?

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?

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.

a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.

b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are

willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this “ask” as the relative price or trade price of lumber.

c. Is the Canadian “ask” you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.
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