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Chapter 20: Q. 17 (page 494)

Are differences in geography behind the

differences in absolute advantages?

Short Answer

Expert verified

Yes, the differences in geography are behind the differences in absolute advantages.

Step by step solution

01

Step 1. Meaning of Absolute Advantage.

A country has an absolute advantage when it can produce the same quantity of output at a lower cost or more quantity of output at the same cost.

02

Step 2. Differences in geography.

Yes, the differences in geography are behind the differences in absolute advantages. For example, Saudi Arabia has an absolute advantage in the production of crude oil due to its geographical location. Guatemala has a more suitable climate to grow coffee. Thus, it is true that natural endowment and geographical location influences absolute advantage.

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Most popular questions from this chapter

What is intra-industry trade?

In Germany, it takes three workers to make one television and four workers to make one video camera. In Poland, it takes six workers to make one television and 12workers to make one video camera.

(a) Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell?

(b) Calculate the opportunity cost of producing one additional television set in Germany and in Poland. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of televisions?

(c) Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras?

(d) In this example, is the absolute advantage the same as comparative advantage, or not?

(e) In what product should Germany specialize? In what product should Poland specialize?

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.

If trade increases world GDP by 1% per year,

what is the global impact of this increase over 10 years? How does this increase compare to the annual GDP of a country like Sri Lanka? Discuss. Hint: To answer this question, here are steps you may want to consider. Go to the World Development Indicators (online) published by

the World Bank. Find the current level of World GDP in constant international dollars. Also, find the GDP of Sri Lanka in constant international dollars. Once you have these two numbers, compute the amount of the additional increase in global incomes due to trade and compare that number to Sri Lanka’s GDP.

What is the absolute advantage? What is comparative advantage?
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