comparative advantage

Question 1

what is the principle of the importance of being unimportant?

Answer 1

as there cannot be two international prices for the same exchange, the two prices must evolve into one somewhere between the two national prices. as the price is determined by the international flows of supply and demand. if the supply of exports is greater then that of the smaller, then the international price would be closer to the ruling country. this means that both countries will gain from price however the UK will gain more

Question 2

what is a comparitive advantage?

Answer 2

Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners

Question 3

what is opportunity cost

Answer 3

the loss of other alternatives when one alternative is chosen.

Question 4

what is a production possibility frontier?

Answer 4

The Production Possibilities Frontier (PPF) is a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology. The PPF captures the concepts of scarcity, choice, and tradeoffs.

Question 5

what does the gradient of a PPF show>?

Answer 5

it shows the opportunity cost

Question 6

what is the PPF curve not a straight line?

Answer 6

it is not a straight line due to the fact that the opportunity cost is not a constant. this is due many factors such as economies of scale. the resources that are least suited to produce Good A will be moved to produce Good B first that is why there is a small decrease in good A at the start but a large increase in B

Question 7

what does it mean if a country is operating inside a production possibility frontier?

Answer 7

any place within the frontier (W)represents a production possibility well withinthe nation’s potential (many resources areunemployed)

Question 8

can a country operate outside the frontier?

Answer 8

any place outside the frontier(Z) is an unattainable production point, giventhe nation’s resources

Question 9

what are the assumptions for the law of comparative

Answer 9

• Two countries, two commodities
• One country absolutely more efficient than the other
• Land, labour, capital and enterprise as factors of production
• Different production function (technology) for each commodity
• Same production function for same commodity in different countries
• Factors internally mobile but internationally immobile
• No transport costs
• Different consumption functions (Demand) in different countries
• Pre-trade consumption positions are on PPFs
• Pre-trade price ratios are different for different countries
• Costs of producing vary (are not constant) as resources switch employments

Question 10

what is an absolute advantage?

Answer 10

The ability of an actor to produce more of a good or service than a competitor

Question 11

when must there be potential gains for trade?

Answer 11

there must be potential gains from trade when the exchange price of industrial to agricultural goods is different for each trading partner

Question 12

why in a multually beneficial trade the tangent to each curve has the same gradient?

Answer 12

it is because the gradient at the tangent represents the trade off ratio so the fact that they have the same means it must be mutually beneficial

Question 13

what are the predictions of comparative advantage?

Answer 13

• Post-trade price ratio evolves to one international terms of trade(depending on international D & S)
• That post trade equilibrium price will be closer to the larger country’s pre-trade price.
• Specialisation in production is not complete
• Reallocation of employment and production is greater for the smaller country
• Exports/GDP ratio is greater for the smaller country (eg UK 25%; USA 15.4%)
• Consumption gains from trade are greater for the smaller country
• Real income in both countries increases

Question 14

what are the critisms about the theory of comparative advantage?

Answer 14

• How can trade bring benefits if there is nothing others can produce more efficiently than ourselves?
• International trade based on low wages will drive our own workers wage seven lower.
• Free trade between the USA and Mexico would lead to a ‘giant suckingsound’ as all US industry is displaced south of the border to lower-wage Mexico. (Ross Perot, Presidential candidate, 1993)
• Free trade exploits lower paid workers in poor countries. How can the CEO of are tail firm who earns US$2 million p.a. justify stocking his shops with denims made by Bangladesh garment workers who get paid less than $40 per month?
• International trade forces poorer countries to remain in a poor, dependent and subservient role producing low wage inputs for high wage developed countries.

Question 15

what is the counter to the critism of “ How can trade bring benefits if there is nothing others can produce more efficiently than ourselves?”

Answer 15

it is not an issue of comparing one country to another that is important it is comparing the efficiency of one industry with another for each country that is crucial. so long as the opportunity cost of producing are different between the countries they will benefit from trade

Question 16

what is the counter to the critism of “International trade based on low wages will drive our own workers wages even lower”

Answer 16

labour is not the only input in production. if wages are lower in country B then there is an incentive to use more labour than capital so adapt a labour intensive production but if labour is more scarce in country A then a high wage capital intensive production technique will be employed. so long as the labour productivity in A is higher then B then the wages will be higher so no need to fear that trade will lead to a sustained fall in wages

Question 17

what is the counter to the critism that “Free trade between the USA and Mexico would lead to a ‘giantsucking sound’ as all US industry is displaced south of the borderto lower-wage Mexico.”

Answer 17

although mexico has a comparitive advantage in low wage industries but the US industry has advantage in high wage high skill industries. there may be a loss in certain industries in both countries but also a gain in other industries as resources reallocate out of declining to growthful. the issue only occurs if there is low occupational or geographical mobility but as long as real income grows then the losers can be compensated

Question 18

what is the counter to the criticism “Free trade exploits lower paid workers in poor countries. How can the CEO of a retail firm who earns US$2 million p.a. justify stocking his shops with denims made by Bangladesh garment workers who get paid less than $40 per month?”

Answer 18

local pay reflects local labour market conditions. would these workers be better of if Bangladesh did not export denim. bang;adesh is home to more than 5600 factories making it one of the biggest garment producers in the world. its exports generated at least 20 billion us dollars in annual revenue in 2014. it is the largest source of the countries foreign exchange earnings. without textiles Bangladesh would be burdened by much poverty and its economy would collapse

Question 19

what is the counter to the critism that “International trade forces poorer countries to remain in a poor, dependent and subservient role producing low wage inputs for high wage developed countries.”

Answer 19

growth and development has to start somewhere but it does not have to remain impoverished. bangladesh has experienced a stable growth rate of over 6%. international trade based on comparative advantage offers a pathway out of poverty and a means to improve skills and eventually access to higher value added employment.