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Chapter 33: Q. 12. (page 803)

How does comparative advantage lead to gains from trade?

Short Answer

Expert verified

Due to exchange opportunities and higher total output and level of consumption, comparative advantage lead to gain from trade.

Step by step solution

01

Step 1. Meaning of comparative advantage.

It is an economy's ability to produce a particular good or services at a lower opportunity cost than its trading partners. Basically, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.

02

Step 2. Following are the ways by which comparative advantage lead to gains from trade, these are:-

a) Due to this comparative advantage, this lead to results in exchange opportunities that lead to consumption opportunities beyond the PPC.

b) Due to the trade between two countries or agents, it allows the countries to enjoy a higher total output and level of consumption than what would have been possible domestically.

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Most popular questions from this chapter

If trade increases world GDP by 1% per year, what is the global impact of this increase over 10 years? How does this increase compare to the annual GDP of a country like Sri Lanka? Discuss. Hint: To answer this question, here are steps you may want to consider. Go to the World Development Indicators (online) published by the World Bank. Find the current level of World GDP in constant international dollars. Also, find the GDP of Sri Lanka in constant international dollars. Once you have these two numbers, compute the amount the additional increase in global incomes due to trade and compare that number to Sri Lanka鈥檚 GDP.

You just got a job in Washington, D.C. You move into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.

You just overheard your friend say the following: 鈥淧oor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.鈥� How would you respond?

Why might intra-industry trade seem surprising from the point of view of comparative advantage?
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