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Chapter 20: Q. 20 (page 494)

You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?

Short Answer

Expert verified

Poor countries should also be included in international trade though there is no absolute advantage.

Step by step solution

01

Step 1. Meaning of absolute advantage.

A country has an absolute advantage in those products in which it has a productivity edge over other countries.

02

Step 2. The response.

Poor countries should also be included in international trade though there is no absolute advantage. They benefit from international trade more than developed nations. Since the poor countries have no formal education, no capital, and no natural resources, they have an abundant supply of labor which can be supplied to other countries at lower wages.

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Most popular questions from this chapter

Why does the United States not have an absolute advantage in coffee?

Does intra-industry trade contradict the theory of

comparative advantage?

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

You just got a job in Washington, D.C. You move

into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?

Table 20.15 shows how the average costs of production for semiconductors (the “chips” in computer memories) change as the quantity of semiconductors built at that factory increases.

a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale?

b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000 semiconductors? 30,000 semiconductors?

c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.
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