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Chapter 19: Q 9. (page 461)

Under what conditions does comparative advantage

lead to gains from trade?

Short Answer

Expert verified

The gains from trade are based only on 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

When a person, organization, or region focuses all their efforts on producing the good or service that they enjoy a comparative advantage in, they can trade the excess quantity produced and gain from this trade.

If each country specializes in the good for which it has a comparative advantage, they can earn benefits by trading the good they specialize in and get the good they don't produce in exchange. This would help them in consuming at a point beyond their production possibility curve.

If a country produces one product and the other produces another product, they will both gain from trade but if one country produces both now, they will still gain from trade because of comparative advantage.

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Most popular questions from this chapter

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.

How can there be any economic gains for a country from both importing and exporting the same good, like cars?

In Japan, one worker can make 5 tons of rubber or 80 radios. In Malaysia, one worker can make 10 tons of rubber or 40 radios.

a. Who has the absolute advantage in the production of rubber or radios? How can you tell?

b. Calculate the opportunity cost of producing 80 additional radios in Japan and in Malaysia. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of radios?

c. Calculate the opportunity cost of producing 10 additional tons of rubber in Japan and in Malaysia. Which country has a comparative advantage in producing rubber?

d. In this example, does each country have an absolute advantage and a comparative advantage in the same good?

e. In what product should Japan specialize? In what product should Malaysia specialize?

True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. Explain.

In Exercise 19.31, is there an “ask” where Venezuelans may say “no thank you” to trading with Canada?
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