Theories of Foreign Trade: Absolute Advantage
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Theories of Foreign Trade: Absolute Advantage

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Questions and Answers

According to Adam Smith, what is trade based on?

Trade is based on absolute advantage.

How does trade based on absolute advantage benefit both nations?

Both nations can gain by specializing in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage.

Provide an example of a country with an absolute advantage in growing wheat but an absolute disadvantage in growing bananas.

Canada is efficient in growing wheat but inefficient in growing bananas.

In what way are resources utilized in trade based on absolute advantage?

<p>Resources are utilized in the most efficient way.</p> Signup and view all the answers

How are the gains from specialization in production divided between two nations through trade?

<p>The gains from specialization in production are available to be divided between the two nations through trade.</p> Signup and view all the answers

What is the concept of absolute advantage in trade, according to Adam Smith?

<p>A nation is more efficient in producing one commodity but less efficient in producing another, leading to gains from trade by specializing in the production of the commodity of its absolute advantage.</p> Signup and view all the answers

How does Adam Smith's concept of absolute advantage contribute to the efficient utilization of resources in trade?

<p>It ensures that resources are utilized in the most efficient way by allowing each nation to specialize in the production of the commodity of its absolute advantage.</p> Signup and view all the answers

Provide an example of how trade based on absolute advantage can benefit two nations, using the concept of wheat and bananas.

<p>Canada, being efficient in growing wheat but inefficient in growing bananas, can benefit by specializing in wheat production and trading with Nicaragua, which is efficient in growing bananas but inefficient in growing wheat.</p> Signup and view all the answers

Explain the relationship between absolute advantage and gains from specialization in production in the context of trade.

<p>Absolute advantage allows for gains from specialization in production, as each nation specializes in the production of the commodity of its absolute advantage, leading to an increase in the output of both commodities through trade.</p> Signup and view all the answers

How does the concept of absolute advantage support the idea that both nations can gain from trade?

<p>It allows both nations to specialize in the production of the commodity of their absolute advantage, leading to gains from trade through the exchange of their respective outputs.</p> Signup and view all the answers

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