International Trade and Specialization

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Questions and Answers

What is the primary reason a country specializes in producing certain goods?

Because it has lower manufacturing costs than other countries (correct)

Because it has no absolute advantage in any goods

Because it wants to increase its business costs

Because it wants to reduce its household purchasing power

According to the theory of absolute advantages, what happens when a country has no cost advantage?

It increases its business costs

It cannot engage in international trade (correct)

It engages in international trade

It reduces its household purchasing power

What does the theory of relative advantages explain about international trade?

That countries will always gain from trade, regardless of their cost advantage (correct)

That countries will only trade if they have a comparative advantage

That countries will never trade with each other

That countries will only trade if they have an absolute advantage

What is a result of specialization, according to the theory of absolute advantages?

Optimal production and increased welfare Signup and view all the answers

What is the main difference between the theory of absolute advantages and the theory of relative advantages?

The theory of absolute advantages focuses on cost differences, while the theory of relative advantages focuses on productivity differences Signup and view all the answers

What is a benefit of international trade, according to the theory of relative advantages?

Stimulated economic growth and employment Signup and view all the answers

What is the main difference between Smith's theory and Ricardo's theory?

Smith's theory assumes no exchange between countries. Signup and view all the answers

What is the opportunity cost of producing wine in Portugal?

Less units of cloth than England. Signup and view all the answers

What is the result of specialization in trade between England and Portugal?

Each country will specialize in the production of one good and trade. Signup and view all the answers

What is the concept that explains why Portugal specializes in wine production?

Comparative advantage Signup and view all the answers

What is the benefit of specialization in terms of production costs?

It reduces production costs. Signup and view all the answers

What is the result of trade between England and Portugal in terms of labor?

The work of 30 men has been freed. Signup and view all the answers

According to Adam Smith, what is the basis of his analysis on the benefits of international trade?

Absolute cost advantages that one country may have over another Signup and view all the answers

What is the concept that highlights the idea that countries can gain from trade by producing goods for which they have a lower opportunity cost?

Comparative advantage Signup and view all the answers

What is the concept that states that countries can gain from trade by producing goods for which they have a lower absolute cost?

Absolute advantage Signup and view all the answers

What is the term for the idea that countries can gain from trade by producing goods for which they are most productive?

Specialization Signup and view all the answers

What is the concept that states that trade can result in a positive sum game, where both countries can gain?

Liberal school Signup and view all the answers

What is the concept that states that trade is a zero-sum game, where one country's gain is another country's loss?

Mercantilist Signup and view all the answers

Study Notes

Specialization in Production

Countries specialize in producing certain goods primarily due to their absolute advantages, meaning they can produce goods at a lower absolute cost than others.
If a country has no cost advantage, it typically leads to inefficiency in producing certain goods, making them less competitive in international markets.

Theory of Absolute and Relative Advantages

Absolute Advantages: When a country specialized in a good it can produce more efficiently, leading to increased overall production and trade benefits.
Relative Advantages: This theory emphasizes that countries can gain from trade by producing goods with lower opportunity costs, allowing for mutually beneficial exchange.

Comparison of Theories

The main distinction between absolute and relative advantages is that absolute advantages focus on overall production costs, while relative advantages consider opportunity costs related to trade efficiency.
Smith's theory is centered on absolute advantages, while Ricardo's theory illustrates relative advantages focusing on opportunity costs.

Opportunity Cost and Trade Outcomes

In Portugal, the opportunity cost of producing wine is the quantity of other goods, such as cheese, that must be sacrificed to produce wine.
The trade between England and Portugal results in each country specializing in the good where they hold a comparative advantage, thereby improving overall production output.

Specialization Benefits

Specialization lowers production costs by improving efficiency and allowing countries to tap into their most productive capacities.
Trade resulting from specialization leads to labor reallocation, where workers can focus on industries aligned with their country's strengths.

Concepts in International Trade

Adam Smith's analysis of international trade highlights the benefits arising from absolute advantages.
The concept of relative advantage explains that countries benefit from trade by producing goods with the lowest opportunity cost.
The zero-sum game theory posits that trade benefits one country at the expense of another, contrasting with the positive sum game theory, which indicates that both countries can benefit and enhance their economic welfare through collaboration.

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Description

Understand the concept of specialization in international trade, its benefits, and the theories behind it, including the theory of absolute advantage. Learn how specialization leads to optimal production and increased welfare for countries.