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Chapter 19: Q 12. (page 461)

How does comparative advantage lead to gains

from trade?

Short Answer

Expert verified

They can gain a comparative advantage by following some rules of comparative advantage.

Step by step solution

01

Step 1. Definition

Comparative advantge refers to the situation when an individual, region, or a nation, can produce a certain good at a comparatively lower opportunity cost than others.

02

Step 2. Explanation

The countries or individuals can gain from comparative advantage when they upgrade their skills and specialize in their comparative advantage. When they do that, their productivity becomes higher and in turn, total production is also higher. And as we know that gains will come when we produce higher than others and from ourselves.

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Most popular questions from this chapter

What is splitting up the value chain?

Does intra-industry trade contradict the theory of

comparative advantage?

France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.

a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.

b. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.

c. Identify which country has the comparative advantage.

d. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?

What is absolute advantage? What is comparative advantage?

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 12 workers to make one video camera.

  1. 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?

  2. 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?

  3. 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?

  4. In this example, is absolute advantage the same as comparative advantage, or not?

  5. In what product should Germany specialize? In what product should Poland specialize?
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