2.3 International economics

Question 1

International Economics

Answer 1

Study of economic activity that occurs across national activity that occurs across national boundaries.

Question 2

Define “comparative advantage”.

Answer 2

Comparative advantage is the ability of a country, business, individual or other entity to produce a particular good or service at a lower opportunity cost than the opportunity cost of producing the good or service by another entity.

Question 3

Define “absolute advantage”.

Answer 3

Absolute advantage is the ability of a country, business, individual or other entity to produce a particular good or service more efficiently (with fewer resources) than another entity.

Question 4

Identify three major reasons for international economic activity.

Answer 4

To develop new markets for the sale of goods and services;
To obtain commodities not otherwise available domestically;
To obtain goods and services at lower costs than available domestically.

Question 5

What are the four broad national attributes (factors) identified by Michael Porter as promoting or impeding the creation of competitive advantage by a country?

Answer 5

Porter’s four factors are:

Factor endowments - the factors of production;
Demand conditions - nature of domestic demand;
Relating and supporting industries - the international competitiveness of related industries;
Firm strategy, structure and rivalry - how companies are created, organized, managed and compete.

Question 6

Identify some of the reasons for comparative advantage between countries.

Answer 6

Differences in availability of economic resources, including:

Natural resources;
Labor;
Technology.

Question 7

According to Porter, the diamond elements, taken together, affect four factors that lead to a national competitive advantage; those factors are:

Answer 7

1. The availability of resources and skills
2. The information that firms use to decide which opportunities to pursue with those resources and skills
3. The goals of the individuals within the firms
4. The pressure on firms to innovate and invest