Comparative and Absolute Advantage in Trade

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Questions and Answers

What is one benefit of free trade compared to a situation of no trade?

Decreased competition among domestic industries

Countries cannot specialize in production

Reduction in the equality of exports and imports

Increased income per capita through specialization (correct)

What is a characteristic of autarky compared to trade?

Domestic production choices are unrestricted

Countries engage freely with foreign markets

Countries specialize based on comparative advantage

It often results in lower consumption and inefficiency (correct)

In the context of constant returns to scale, what occurs when a producer doubles their input of production factors?

Output will double exactly (correct)

Output will halve

Output will remain the same

Output will increase but at a decreasing rate

What does the Production Possibility Frontier (PPF) illustrate about a country that engages in trade based on comparative advantage?

A country can produce more of one good at the expense of another Signup and view all the answers

Which of the following best defines consumer choice in a free trade environment?

Increases with a wider selection of imported goods Signup and view all the answers

What does comparative advantage imply for the countries involved in trade?

At least one country benefits while neither country is worse off. Signup and view all the answers

Which country has an absolute advantage in the production of both Wheat and Cloth?

Germany Signup and view all the answers

How does the concept of opportunity cost relate to comparative advantage?

A country must produce goods that have low opportunity costs. Signup and view all the answers

What is the opportunity cost of producing one meter of Cloth in Germany?

1 ton of Wheat Signup and view all the answers

In a situation of constant returns to a factor of production, how does the marginal productivity behave?

It remains stable regardless of the number of units used. Signup and view all the answers

How do the marginal productivities in Canada and Germany compare for the production of Wheat?

Germany has higher marginal productivity than Canada. Signup and view all the answers

What role does specialization play in the benefits derived from trade?

It allows countries to produce based on comparative advantage. Signup and view all the answers

Which factor is highlighted as most important in determining opportunity costs in this context?

Marginal productivity of labor. Signup and view all the answers

What is one primary reason for the benefit of specialization in production?

It often results in lower unit costs and enhanced efficiency. Signup and view all the answers

How did Japan acquire its absolute advantage in semiconductor production?

Deliberate decision to acquire and improve know-how. Signup and view all the answers

Which statement best explains why absolute advantages are often outcomes of specialization?

Specialization allows workers to acquire more dexterity and know-how. Signup and view all the answers

Which country has an absolute advantage in coffee production due to natural resources?

Brazil Signup and view all the answers

What is a likely consequence for a nation that adopts policies disincentivizing work?

Loss of competitive advantage. Signup and view all the answers

What kind of advantage does Canada have in producing paper pulp?

Favorable climatic and natural resource conditions. Signup and view all the answers

Which of the following is a benefit of specialization and division of labor?

Accumulation of skills and knowledge. Signup and view all the answers

Which region has an absolute advantage in the production of fish?

The Maritimes Signup and view all the answers

Study Notes

Comparative Advantage

Comparative advantage occurs when a country specializes in the production of goods where it has a lower opportunity cost compared to other countries.
Opportunity cost is the value of the next best alternative forgone.
In the example of Canada and Germany, Germany has a comparative advantage in wheat production, while Canada has a comparative advantage in cloth production.
This means that Germany can produce more wheat for every unit of labor compared to Canada. Similarly, Canada can produce more cloth per unit of labor compared to Germany.
This results in countries being able to produce more goods overall when they specialize and trade with each other.

Absolute Advantage

Absolute advantage occurs when a country can produce more of a good than another country using the same amount of resources.
Germany has an absolute advantage in both wheat and cloth production, as a German worker can produce more of each good compared to a Canadian worker.
Absolute advantage does not necessarily guarantee a country will specialize in producing that good.
Absolute advantage is often a result of specialization and specialization improves workers' skills and productivity.
Examples of countries with absolute advantages:
- Switzerland in watch making due to specialization in watchmaking skills.
- Japan in semiconductor production due to acquiring knowledge and expertise over time.
- Brazil in coffee bean production due to favorable climate and soil conditions.
- Canada in wood products due to its large forests.
- The Maritimes (Canada) in fish production due to fertile fishing grounds.
- The prairies (Canada) in wheat production due to favorable soil and climate.

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Description

This quiz explores the concepts of comparative and absolute advantage in international trade. Understand how countries specialize in production based on opportunity costs and resource efficiency. Test your knowledge on examples involving Canada and Germany.