5.3: Absolute Advantage Flashcards
What is absolute advantage in the context of international trade?
Absolute advantage refers to a country’s ability to produce a specific product more efficiently than any other country, utilizing fewer resources in the production process.
According to Adam Smith, what was the basis of a country’s absolute advantage in trade?
A country’s absolute advantage was based on its efficiency in producing specific goods, often due to factors like superior technology, favorable climate, and accumulated expertise.
How did Adam Smith argue countries should specialize in trade?
Smith argued that countries should specialize in producing goods for which they have an absolute advantage and trade these goods with other nations.
This specialization leads to mutual benefits in international trade.
Using the example of Ghana and South Korea, explain the concept of production possibilities frontier (PPF).
PPF represents the different combinations of two goods (in this case, rice and cocoa) that a country can produce given its available resources. It demonstrates the trade-offs between producing different goods.
Figure 5.1: The Theory of Absolute Advantage
Explain the concept of comparative advantage in the context of the given scenario.
Comparative advantage refers to the ability of a country to produce a good at a lower opportunity cost than another country.
In this case, both Ghana and South Korea benefit from comparative advantage when they specialize in producing the goods for which they have the absolute advantage and trade with each other.
Is trade a zero-sum game according to the example provided?
No, trade is not a zero-sum game.
The example demonstrates that trade is a positive-sum game, creating net gains for all involved by increasing production and consumption of goods.
According to comparative advantage theory, why might a country choose to import a product it can produce reasonably well domestically?
A country might choose to import a product it can produce reasonably well if it can produce something else even more efficiently due to the principle of comparative advantage.
What is the strategic balancing act that countries engage in regarding international trade and self-sufficiency?
Countries balance between being as efficient as possible by engaging in international trade when advantageous and being as self-sufficient as possible by producing inside their country.
Why is limiting imports often in the interests of domestic producers but not domestic consumers, especially in the context of absolute advantage theory?
Limiting imports can protect domestic producers by preventing competition from more efficient foreign producers.
However, this might not be in the best interest of domestic consumers, who generally seek the best products for the money they are willing to pay.
According to comparative advantage theory, is there any product that should always be produced at home?
Comparative advantage theory suggests that there is no specific product that should always be produced at home.
Countries should assess their efficiency in production and make decisions based on the opportunity cost of producing one good over another.
Who are the key proponents of comparative advantage theory, and how did it refine the concept of international trade from Adam Smith’s absolute advantage theory?
Comparative advantage theory was originally conceptualized by David Ricardo and later refined by economists like Eli Heckscher and Bertil Ohlin.
It emphasized that countries should specialize in producing goods where they have a comparative advantage, leading to efficient global trade patterns.
In the context of international trade, what do domestic consumers generally seek, and how does this impact their preferences for imported goods?
Domestic consumers seek the best products they can get for the money they are willing to pay.
If other countries can produce certain goods more efficiently, domestic consumers may prefer imported goods to access higher quality or more affordable products.
