ECON 101 Lecture Notes - Lecture 23: Comparative Advantage, Opportunity Cost, Economic Surplus

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6 Jun 2016

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ECON 101 Full Course Notes

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Chapter 10: how markets function in the global economy: the role of international trade. Globalization has increased over the last few decades: the flow of goods, services, people, ideas and capital across borders. Both exports and imports have expanded faster than the u. s. economy during the last. Foreign trade is less important to the u. s. than it is to most other countries. Exports and imports are generally larger shares of output for smaller countries than for larger countries, with the exception of china. Every country can benefit by specializing in producing and exporting the goods for which it has a comparative advantage and importing the goods for which other countries have a comparative advantage. In a ppf, the slope is the opportunity cost of producing that good. A flatter slope means a greater lower cost. Trade enables global production of a good to increase. Specialization and trade are like an advance in technology, making consumption outside the ppf possible.

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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

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.

turquoiseferret638

what is a key factor that determines a firm's profitability?

A differentiation of a firm's product from other products

B factors affecting a firm's entire market

C a firm's average cost of production relative to that of competing firms

D chance events

E all of the above

economic theory suggests countries benefit from international trade by producing more of those good and services for which they have a comparative advantage (and less of that for which a country does not have a comparative advantage). However, countries rarely specialize completely, why?

even with international trade, countries rarely specialize completely because

A, all goods and services can be traded internationally

B, some countries would lose as a result of free trade

C, consumers in different countries have homogeneous tastes

D, some countries do not have an absolute advantege producing anything

E, production of most goods involves increasing opportunity costs.

ECON 101 Lecture Notes - Lecture 23: Comparative Advantage, Opportunity Cost, Economic Surplus

ECON 101 Full Course Notes

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