Structure The Principle of Comparative Advantage Instructor Insight This long chapter will be quite difficult for students who are not well versed in principles of microeconomics. It will take more than a week to adequately cover the entire chapter. The first section covers the principle of comparative advantage using a simple Ricardian model with two countries, two goods, and one factor of production. Both countries are shown to benefit from trade.
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Structure The Principle of Comparative Advantage Instructor Insight This long chapter will be quite difficult for students who are not well versed in principles of microeconomics. It will take more than a week to adequately cover the entire chapter. The first section covers the principle of comparative advantage using a simple Ricardian model with two countries, two goods, and one factor of production.
Both countries are shown to benefit from trade. Factors influencing the distribution of those gains between countries are discussed. The second section Comparative Opportunity Cost generalizes the analysis by introducing an additional factor of production.
The pattern of comparative advantage is analyzed using figures on per unit production costs rather than productivity data. The third section Absolute Advantage and Wage Rates shows that absolute advantage determines relative wage rates between nations. Section four Summary of Policy Implications reminds us that trade raises the real income of a community by improving the efficiency of resource utilization. Any interference with free trade generally results in an inefficient pattern of resource use and a loss of income to the community.
Students should come away from this chapter with an understanding of the gains from trade, sources of trade gains, the commodity composition of trade, behavior of prices and outputs with trade, and why they should seek employment in comparative advantage activities and avoid import-competing sectors.
Summary This sample only, Download all chapters at: alibabadownload. Comparative advantage determines which goods are exported and which are imported, and defines the limits to mutually beneficial trade. Trade leads to complete specialization in the Ricardian example due to the assumption that production costs per unit of output remain constant as output expands or contracts. The existence of one homogeneous factor of production labor gives rise to constant cost conditions.
Relative wages and, hence, living standards of countries are determined by absolute, not comparative advantage. Trade raises real income of a community by encouraging a more efficient allocation of productive resources across sectors.
Trade is anti-inflationary, and growth promoting. Condensed Answers to Review Questions 1. The U. Wheat is cheaper in terms of textiles in the U. Textiles are cheaper in terms of wheat in the U. It would be willing to trade 3 bushels of wheat for more than 1 yard of textiles. Limits to mutually beneficial trade vary between 3 bushels of wheat for the U.
Limits to a sustainable exchange rate are determined by assigning each commodity the price it commands in the country in which it is produced, in terms of the currency of that country. Limits to the sustainable exchange rate are determined by these cost ratios. Consider Figure 2. The domestic cost ratios define limits of mutually beneficial trade.
A full analysis requires an understanding of reciprocal demand curves, but the following general principle might help heuristically. If the British are more eager to buy U. Since the real world does not conform to the convenient two-country, two-good assumptions, the simple theoretical model is not immediately applicable. However, we can generalize the model to many goods and many nations. The fundamental truth remains. Countries export those goods in which their relative production costs are lower and import those goods for which the relative costs are higher.
While trade tends to raise the prices of exportables in the domestic economy, the effect of trade is to lower the average price level of all goods. Trade gives consumers an opportunity to consume at lower world prices.
Many goods will be cheaper when purchased from foreign supply sources. Trade also conveys procompetitive effects, stimulates the adoption of new technologies, and allows firms to achieve efficient scale production levels. Thus, trade is anti-inflationary. The reunification of the German economy in was undertaken on the basis that a unit of the deutschmark, the West German currency, should be equal in value to a unit of the ostmark, the East German currency.
At this exchange rate, goods produced in East Germany were almost universally more expensive to produce than their counterparts in the West. Under these conditions the East German manufacturing sector collapsed. Investors were reluctant to purchase East German factories and large scale closures and dismissals resulted.
If the U. If a country possesses absolute advantage over another country in all commodities we can infer that its labor is more productive, and that wage rates and standards of living will be higher.
We need to know the structure of comparative advantage before we can determine the direction of trade. A country will export that good in which it has a comparative advantage and import that good in which it has a comparative disadvantage. It also produces oil, but will gain by specializing in grain production and using proceeds of exported agricultural products to purchase oil from nations that produce oil relatively more efficiently.
Russia is relatively more efficient in the production of oil and will gain by purchasing grain from the U. The popular press asserts that by exporting grain from the U. Since grain is an important ingredient in many food products, grain exports are believed to increase the price of those products. However, the price of grain is determined in world markets.
If the domestic U. We can infer that unit labor costs in steel rose relative to manufacturing because wages in steel advanced more quickly than those in other industries while productivity moved at the same rate. In Japan, because both wages and productivity rose at the same rate as the rest of manufacturing, relative unit labor costs between steel and manufacturing remained constant.
Consequently, the U. Table presents data on unit labor costs in certain sectors relative to that of all manufactures. Iron and steel and motor vehicle sectors in the U. When compared with corresponding figures for Japan and Germany, we can conclude the U. The reverse holds for high-tech sectors in the U.
Enhance your education with instant download, quick delivery and free sample PDF options. What is the difference between a test bank and a solution manual? Solution Manual contains comprehensive answers to the end of chapter questions, problems and exercises. Test Bank is a very useful collection of exam questions including multiple choice, true or false, fill in the blanks, short and essay answers with solutions. What should I choose?
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