01:220:300 Chapter Notes - Chapter 2: Absolute Advantage, Marginal Product, Offshoring

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skyoyster85

8 Feb 2020

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Differences in the technology used in each country. Differences in the total amount of resources, including labor, capital, and land found in each country. Land labor and capital are known as factors of production. The proximity of countries to one another. Explains why canada is the united states" top trading partner overall. Free-trade area means the countries in the agreement put no restrictions on trade. When a countey has the best technology for producing a good, it has an absolute advantage in the production of that good. The primary explanation for trade among countries. A country has a comparative advantage in producing those goods that it produces best compared with how well it produces other goods. Marginal product of labor is the extra output obtained by using one more unit of labor. The straight line ppf is a feature of the ricardian model and it follows from the assumption that the marginal products of labor are constant.

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PART B â Questions 10 â 27 Use the following assumptions to answer all questions: â¢ There are three countries â Argentina, Britain and Canada. â¢ Each country produces and consumes two kinds of goods â crude oil and beef. â¢ All countries make their goods from a single type of input â labor â and each country has 700 hours of labor available to produce crude oil and beef. â¢ Each country demands 5 (five) barrels of crude oil. This assumption simply means that a country must have exactly 5 barrels of crude oil â it may produce them domestically, it may import them from abroad, or it makes some domestically and imports the rest. â¢ Countries produce goods using the technology described in the table below Technology Hours of labor needed to produce one unit of good Using the above assumptions, answer the following questions: â¢ Calculate the quantities of crude oil and beef produced in each country in autarky (when they do not trade and each country produces its own crude oil and beef) â¢ Order the countries according to their absolute advantage in production of crude oil â¢ Order the countries according to their absolute advantage in production of beef â¢ Consider the case where countries are free to specialize and trade. In the table below calculate each countryâs opportunity cost of producing one unit of each good. â¢ Calculate the quantities of crude oil and beef produced in each country, consistent with the countryâs comparative advantage. Based on the above calculations, answer questions 10 through 27: Consider autarky, when countries do not trade and each country produces its own crude oil and beef. 10. In autarky, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 11. In autarky, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 12. In autarky, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 13. In autarky, Argentina produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 14. In autarky, Britain produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 15. In autarky, Canada produces _____ pounds of beef. a. 0 b. 70 c. 150 d. 400 16. Country of _____ has absolute advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 17. Country of _____ has absolute advantage in production of beef. a. Argentina b. Britain c. Canada d. No country Consider effects of specialization, when countries are allowed to trade. 18. When countries specialize, Argentina produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 19. When countries specialize, Britain produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 20. When countries specialize, Canada produces _____ barrels of oil. a. 0 b. 5 c. 10 d. 15 21. When countries specialize, Argentina produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 22. When countries specialize, Britain produces _____ pounds of beef. a. 0 b. 700 c. 150 d. 400 23. When countries specialize, Canada produces ____ pounds of beef. a. 0 b. 700 c. 150 d. 400 24. Country of __C___ has comparative advantage in production of crude oil. a. Argentina b. Britain c. Canada d. No country 25. Country of ___A__ has comparative advantage in production of beef. a. Argentina b. Britain c. Canada d. No country 26. Countries gain from trade because specialization increases ____. a. Trade deficit b. Unemployment c. Efficiency d. Inflation 27. Countries should trade with trading partners that _____. a. Are equally technologically advanced b. Use superior technology in every industry c. Use less advanced technology in every industry d. Use different technologies, because trade benefits all

champagnebee680

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

COMPARATIVE ADVANTAGE

Consider the following data for two countries: England and Portugal:

Output per Unit of Labor

Wine (barrels) Cloth (yards)

England 16 8

Portugal 4 1

Does either country have an absolute advantage in producing Wine? Cloth? Explain.

Construct a table indicating the opportunity costs for each good in each country. Using this table explains the comparative advantage of each country.

How would Ricardo expect trade to develop between these countries if no restrictions are applied?

Why would Ricardo conclude that trade between these two countries would benefit both? What key assumption does he make in reaching this conclusion?

Why would an English mercantilist object to Ricardoâs conclusion? What policies might that mercantilist then propose for England?

blueoyster377

01:220:300 Chapter Notes - Chapter 2: Absolute Advantage, Marginal Product, Offshoring

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