International Trade and Comparative Advantage
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International Trade and Comparative Advantage

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Questions and Answers

A country with an absolute advantage in both industries will always specialize completely in one product.

False

What is the opportunity cost of producing one unit of cloth in Portugal?

2 units of wine

A country has a comparative advantage when it can produce a product at a _______________________ opportunity cost than its competitor.

lower

What happens to the total production of cloth in the world when both countries specialize completely?

<p>It decreases by 5 units</p> Signup and view all the answers

A country with a comparative advantage in a product will always export that product.

<p>True</p> Signup and view all the answers

What is the gain in wine production in the world when Portugal produces 50 units of wine and England produces 20 units of cloth?

<p>15 units</p> Signup and view all the answers

Portugal is willing to import cloth if it is asked less than _______________________ units of wine for 1 unit of cloth.

<p>2</p> Signup and view all the answers

Match the following countries with their production totals after specialization:

<p>Portugal = 60 units of wine England = 20 units of cloth</p> Signup and view all the answers

What is the opportunity cost of producing one unit of wine in England?

<p>1/2 unit of cloth</p> Signup and view all the answers

What is the principle extended by international trade?

<p>Division of Labour</p> Signup and view all the answers

International trade is disadvantageous to all countries.

<p>False</p> Signup and view all the answers

What is the benefits of specialisation in international trade?

<p>Surpluses are created which can be traded with other countries, achieving a higher standard of living.</p> Signup and view all the answers

By specialising in the production of only some goods and services, _______________________ are created.

<p>surpluses</p> Signup and view all the answers

What is the theory that explains the benefits of international trade?

<p>Comparative Advantage</p> Signup and view all the answers

England has an absolute advantage in wine production.

<p>False</p> Signup and view all the answers

Match the country with the good it has an absolute advantage in producing.

<p>Portugal = Wine England = Cloth</p> Signup and view all the answers

What is the principle of comparative advantage?

<p>Concentrate on producing those goods that a country can produce most cheaply or is least worse.</p> Signup and view all the answers

By trading surpluses with that of other countries, a _______________________ standard of living can be achieved.

<p>higher</p> Signup and view all the answers

What is the result of specialisation and trade between two countries?

<p>Both countries consume more of both goods</p> Signup and view all the answers

What is the condition for a country to benefit from specialisation and trade?

<p>The terms of trade lie between the countries' opportunity cost ratios</p> Signup and view all the answers

A country with a comparative advantage in a product will always export that product.

<p>False</p> Signup and view all the answers

What is the gain in wine production in the world when Portugal produces 60 units of wine and England produces 20 units of cloth?

<p>25 units</p> Signup and view all the answers

Portugal is more efficient in the production of both goods, but this is _______________.

<p>irrelevant</p> Signup and view all the answers

Match the following countries with their opportunity costs of producing one unit of cloth:

<p>Portugal = 2W England = ½W</p> Signup and view all the answers

What is the result of complete specialisation and trade between two countries?

<p>We cannot say without some knowledge of demand and the value placed on consumption</p> Signup and view all the answers

A country with an absolute advantage in both industries will always specialize completely in one product.

<p>False</p> Signup and view all the answers

What is the opportunity cost of producing one unit of wine in England?

<p>2C</p> Signup and view all the answers

A country has a comparative advantage when it can produce a product at a _______________ opportunity cost than its competitor.

<p>lower</p> Signup and view all the answers

What is the benefit of specialisation in international trade?

<p>Increased production and efficiency</p> Signup and view all the answers

What is the principle that explains the benefits of international trade?

<p>Theory of Comparative Advantage</p> Signup and view all the answers

A country with an absolute advantage in both industries will always specialize completely in one product.

<p>False</p> Signup and view all the answers

What is the result of specialisation and trade between two countries?

<p>Both countries can consume more of both goods.</p> Signup and view all the answers

International trade is an extension of the principle of _______________________.

<p>division of labour</p> Signup and view all the answers

Which country has an absolute advantage in wine production?

<p>Portugal</p> Signup and view all the answers

International trade is advantageous to all countries.

<p>True</p> Signup and view all the answers

What is the benefit of specialisation in international trade?

<p>Higher standard of living</p> Signup and view all the answers

By specialising in the production of only some goods and services, _______________________ are created.

<p>surpluses</p> Signup and view all the answers

Match the countries with the good they have an absolute advantage in producing:

<p>Portugal = Cloth England = Wine</p> Signup and view all the answers

Study Notes

International Trade

  • International trade is an extension of the principle of 'division of labour', allowing countries to specialize in producing certain goods and services.
  • By specialising, countries can create surpluses that can be traded with other countries, leading to a higher standard of living.
  • Specialization and trade are beneficial because of the principle of comparative advantage.

Absolute Advantage and Comparative Advantage

  • Absolute advantage refers to a country's ability to produce more of a product per resource unit (i.e. labour) than another country.
  • Comparative advantage refers to a country's ability to produce a product at a lower opportunity cost than its competitor.
  • A country has a comparative advantage when it can produce a product at a lower opportunity cost than its competitor.

Examples of Specialization and Trade

  • Portugal has an absolute advantage in wine production, while England has an absolute advantage in cloth production.
  • If Portugal and England specialize in the production of the commodity in which they are most efficient, they can increase production and trade.
  • Portugal has a comparative advantage in wine production, while England has a comparative advantage in cloth production.

Opportunity Cost and Trade

  • Opportunity cost is the cost of producing one product in terms of the other.
  • Portugal's opportunity cost of producing one unit of wine is ½ unit of cloth, while England's opportunity cost of producing one unit of cloth is ½ unit of wine.
  • As long as the opportunity cost ratios are different and the terms of trade lie between the countries' opportunity cost ratios, each country will benefit from specialization and trade.

Gains from Trade

  • When countries specialize and trade, they can increase production and gain from trade.
  • In the case where one country is more efficient in both activities, the gain from trade is not certain and depends on the demand and value placed on consumption of goods by the inhabitants of the two countries.
  • However, if at least as much of one good and more of the other results from specialization and trade, there is a welfare gain.

International Trade

  • International trade is an extension of the principle of 'division of labour', allowing countries to specialize in producing certain goods and services.
  • By specialising, countries can create surpluses that can be traded with other countries, leading to a higher standard of living.
  • Specialization and trade are beneficial because of the principle of comparative advantage.

Absolute Advantage and Comparative Advantage

  • Absolute advantage refers to a country's ability to produce more of a product per resource unit (i.e. labour) than another country.
  • Comparative advantage refers to a country's ability to produce a product at a lower opportunity cost than its competitor.
  • A country has a comparative advantage when it can produce a product at a lower opportunity cost than its competitor.

Examples of Specialization and Trade

  • Portugal has an absolute advantage in wine production, while England has an absolute advantage in cloth production.
  • If Portugal and England specialize in the production of the commodity in which they are most efficient, they can increase production and trade.
  • Portugal has a comparative advantage in wine production, while England has a comparative advantage in cloth production.

Opportunity Cost and Trade

  • Opportunity cost is the cost of producing one product in terms of the other.
  • Portugal's opportunity cost of producing one unit of wine is ½ unit of cloth, while England's opportunity cost of producing one unit of cloth is ½ unit of wine.
  • As long as the opportunity cost ratios are different and the terms of trade lie between the countries' opportunity cost ratios, each country will benefit from specialization and trade.

Gains from Trade

  • When countries specialize and trade, they can increase production and gain from trade.
  • In the case where one country is more efficient in both activities, the gain from trade is not certain and depends on the demand and value placed on consumption of goods by the inhabitants of the two countries.
  • However, if at least as much of one good and more of the other results from specialization and trade, there is a welfare gain.

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Understand the principles of international trade, including division of labor, specialization, and comparative advantage. Learn how countries benefit from trade and improve their standard of living.

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