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Chapter 33: Q. 20. (page 804)

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?

Short Answer

Expert verified

Because of comparative advantage, if Malawi do not have absolute advantage, poor soil, low investment in formal education etc. still Malawi can produce goods and services at lower opportunity cost.

Step by step solution

01

Step 1. Introduction

The ability to produce a product at a relatively lower cost or to produce a higher quantity at the same cost is known as absolute advantage. While, the ability to produce at a realtively lower opportunity cost is known as competitive advantage.

02

Step 2. About absolute advantage and comparative advantage.

Most economist would respond saying that what matters is not absolute advantage but comparative advantage. Comparative advantage came into existence as a solution to the problem which can take place when a nation tends to have absolute advantage in all the commodities while others do not. Though Malawi do not have absolute advantage but because of comparative advantage Malawi can produce goods and services at an efficient and cheaper rate at lower opportunity cost.

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Most popular questions from this chapter

How does comparative advantage lead to gains from trade?

Why does the United States not have an absolute advantage in coffee?

Review the numbers for Canada and Venezuela from Table 19.12 which describes how many barrels of oil and tons of lumber the workers can produce. Use these numbers to answer the rest of this question.

a. Draw a production possibilities frontier for each country. Assume there are 100 workers in each country. Canadians and Venezuelans desire both oil and lumber. Canadians want at least 2,000 tons of lumber. Mark a point on their production possibilities where they can get at least 3,000 tons.

b. Assume that the Canadians specialize completely because they figured out they have a comparative advantage in lumber. They are

willing to give up 1,000 tons of lumber. How much oil should they ask for in return for this lumber to be as well off as they were with no trade? How much should they ask for if they want to gain from trading with Venezuela? Note: We can think of this 鈥渁sk鈥� as the relative price or trade price of lumber.

c. Is the Canadian 鈥渁sk鈥� you identified in (b) also beneficial for Venezuelans? Use the production possibilities frontier graph for Venezuela to show that Venezuelans can gain from trade.

France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.

a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.

b. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.

c. Identify which country has the comparative advantage.

d. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?

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