ECON 200 Chapter Notes - Chapter 17: Autarky, Economic Surplus, Factor Endowment

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lemonsnail891

2 Mar 2015

School

University of Maryland

Department

Economics

Course

ECON 200

Professor

Cindy Clements

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Absolute advantage- the ability to produce more of a good than others with a. Comparative advantage- the ability to produce a good or service at a lower given amount of resources opportunity cost than others can. Gains from trade- the increase in welfare in both countries that results from specialization and trade. Each country can produce the goods that it has a comparative advantage at producing, rather than the exact combination of goods its consumers want. Both countries can consume more than they were able to before. When everyone responds to the profit motives they face as individual producers, the invisible hand guides them to make products in which they have a comparative advantage. Climate and geography can affect the costs of transporting goods to other places once they are produced. The relative abundance of different factors of production makes some countries better suited to produce certain goods.

Related Questions

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

Trade can be beneficial to an economy because:

A. it prevents specialization in those activities in which countries have a comparative advantage.

B. it prevents unemployment.

C. it results in more efficient use of the combined resources of some of the trading countries, even though it reduces efficiency in others.

D. more goods and services can be obtained at a lower opportunity cost.

ivoryllama613

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

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ECON 200 Chapter Notes - Chapter 17: Autarky, Economic Surplus, Factor Endowment

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