Chap 2

Question 1

What is comparative advantage ?

Answer 1

• The ability to produce goods and services at a lower opportunity cost than that of trade partners.

in trade :
Production (LESS IMPORTANT )
Opportunity cost (IMPORTANT)
Unrelated issue LIKE WAR (IMPORTANT)

Question 2

Crucial important point about Comparative advantage :

Answer 2

• A country must have a comparative advantage in something

- A country can’t have comparative in both goods

Question 3

What is absolute advantage ?

Answer 3

It is the ability of an individual, company, region or country to produce a good or service at a lower cost per unit than any other competitor .( in everything )

Question 4

In a Ricardian model, what determine comparative advantage and what determine absolute advantage ?

Answer 4

• Comparative advantage determine pattern of trade

- Absolute advantage determines the international distribution of income.

Question 5

In a Ricardian model, in what specialize ( or not ) small countries

Answer 5

• Small countries specialize in EQUILIBRIUM

- if a large country does not specialize, it does not gain from trade