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Chapter 19: Q 20. (page 462)

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

I will respond in a knowledgeable manner.

Step by step solution

01

Step 1. Definition

The ability to produce a greater quantity of a good or service with the same number of inputs or to produce the same quantity of a good or service using a lesser quantity of inputs is referred to as absolute advantage.

02

Step 2. Explanation

Advantageous trade can happen only if opportunity costs differ and this gives a comparative advantage.

A beneficial trade depends mainly upon comparative advantage and it has no relation with absolute advantage. So Malavi doesn鈥檛 have to be in absolute advantage to have an advantageous trade, only comparative advantage is sufficient.

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Most popular questions from this chapter

Table 19.15 shows how the average costs of production for semiconductors (the 鈥渃hips鈥� in computer memories) change as the quantity of semiconductors built at that factory increases.

a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale?

b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors 50,000 semiconductors? 30,000 semiconductors?

c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.

What is absolute advantage? What is comparative advantage?

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.

Can a nation鈥檚 comparative advantage change over

time? What factors would make it change?

Consider two countries: South Korea and Taiwan. Taiwan can produce one million mobile phones per day at the cost of \(10 per phone and South Korea can produce 50 million mobile phones at \)5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?
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