MGEC82H3 Lecture Notes - Lecture 2: Wage, Absolute Advantage, International Trade

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f511

11 Dec 2021

School

UTSC

Department

Economics for Management Studies

Course

MGEC82H3

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Mgec82 (frazer) foundations of modern trade theory: comparative advantage lecture 2: true, false, or uncertain. If one country is more productive at producing everything than another country, then it has nothing to gain from trading with other countries. To fix ideas, discuss in the context of a world with two countries, and two goods (say cheese and wine). The country who is more productive at producing cheese and wine has an absolute and comparative advantage in both goods. Trade is possible even if a country has an absolute cost disadvantage in the production of both cheese and wine. The more efficient country specialized and exports goods in which it is relatively more efficient or where its absolute advantage is greatest. However, the less efficient country specializes and exports in the good which it is relatively less inefficient or where its absolute disadvantage is least: true, false, or uncertain.

Related Questions

43) From the figures we can conclude A) that country A has an absolute advantage in the production of x only. B) that country A has an absolute advantage in the production of y only. C) that country A has an absolute advantage in the production of neither good. D) that country A has an absolute advantage in the production of both goods. E) nothing with respect to absolute advantage without more information regarding resource levels in the two countries

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

If a country has a comparative advantage in the production of a good:

a. it can produce that good at a lower opportunity cost.

b. it will not find trade beneficial because other countries won't have a comparative advantage in other goods.

c. it must also have an absolute advantage in the good.

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MGEC82H3 Lecture Notes - Lecture 2: Wage, Absolute Advantage, International Trade

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