Comparative Advantage

Question 1

Mercantilism

Answer 1

• Trade benefits a nation
• Government regulation of trade was necessary to provide largest national benefits.
• National holdings of gold + silver are good.
• Trade seen as zero sum activity as surplus of 1 country when they sold exports and offset by another country’s deficit.

Question 2

Smiths absolute advantage theory

Answer 2

Never attempt to make at home what it will cost more to make than to buy.
Rebuttal to mercantilism - imports expand national consumption, free trade leads to gain for all countries, positive sum activity.

Question 3

Absolute Advantage

Answer 3

Each country exports the product with the higher labour productivity.

Question 4

Ricardo’s comparative advantage theory

Answer 4

A country will export products that it can produce at a lower opportunity cost. A country will import products it would otherwise produce at a higher opportunity cost.