Self-Check Questions

Key Terms

absolute advantage when one country has more resources, more productive resources, or a natural endowment to produce a good compared to another country; when a country can produce more of a good compared to another country gain from trade a country that can consume more than it can produce as a result of specialization and trade intra-industry trade international trade of goods within the same industry splitting up the value chain many of the different stages of producing a good happen in different geographic locations tariffs taxes that governments place on imported goods value chain how a good is produced in stages

Key Concepts and Summary

19.1 Absolute and Comparative Advantage

A country has an absolute advantage in those products in which it has a productivity edge over other countries; it can produce more of a product. A country has a comparative advantage when it can produce a good at a lower cost in terms of other goods. Countries that specialize based on comparative advantage gain from trade.

19.2 What Happens When a Country Has an Absolute Advantage in All Goods

Even when a country has high levels of productivity in all goods, it can still benefit from trade. Gains from trade come about as a result of comparative advantage. By specializing in a good that it gives up the least to produce, a country can produce more and offer that additional output for sale. If other countries specialize in the area of their comparative advantage as well and trade, the highly productive country is able to benefit from a lower opportunity cost of production in other countries.

19.3 Intra-Industry Trade between Similar Economies

A large share of global trade happens between high-income economies that are quite similar in having well- educated workers and advanced technology. These countries practice intra-industry trade, in which they import and export the same products at the same time, like cars, machinery, and computers. In the case of intra-industry trade between economies with similar income levels, the gains from trade come from specialized learning in very particular tasks and from economies of scale. Splitting up the value chain means that several stages of producing a good take place in different countries around the world.

19.4 The Benefits of Reducing Barriers to International Trade

Tariffs are placed on imported goods as a way of protecting sensitive industries, for humanitarian reasons, and for protection against dumping. Traditionally, tariffs were used as a political tool to protect certain vested economic, social, and cultural interests. The WTO has been, and continues to be, a way for nations to meet and negotiate in order to reduce barriers to trade. The gains of international trade are very large, especially for smaller countries, but are beneficial to all.

Self-Check Questions

1 . True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. Explain. 2 . Brazil can produce 100 pounds of beef or 10 autos. In contrast the United States can produce 40 pounds of beef or 30 autos. Which country has the absolute advantage in beef? Which country has the absolute advantage in producing autos? What is the opportunity cost of producing one pound of beef in Brazil? What is the opportunity cost of producing one pound of beef in the United States? 3 . In France it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in production of sweaters? Who has the absolute advantage in the production of wine? How can you tell? 4 . In Germany it takes three workers to make one television and four workers to make one video camera. In Poland it takes six workers to make one television and 12 workers to make one video camera. a. Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell? b. Calculate the opportunity cost of producing one additional television set in Germany and in Poland. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of televisions? c. Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras? d. In this example, is absolute advantage the same as comparative advantage, or not? e. In what product should Germany specialize? In what product should Poland specialize? 5 . How can there be any economic gains for a country from both importing and exporting the same good, like cars? 6 . Table 19.15 shows how the average costs of production for semiconductors (the “chips” in computer memories) change as the quantity of semiconductors built at that factory increases. a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale? b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000 semiconductors? 30,000 semiconductors? c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers. Quantity of Semiconductors Average Total Cost 10,000 $8 each 20,000 $5 each 30,000 $3 each 40,000 $2 each 100,000 $2 each TABLE 19.15 7 . If the removal of trade barriers is so beneficial to international economic growth, why would a nation continue to restrict trade on some imported or exported products?

Review Questions

8 . What is absolute advantage? What is comparative advantage? 9 . Under what conditions does comparative advantage lead to gains from trade? 10 . What factors does Paul Krugman identify that supported expanding international trade in the 1800s?