Quiz 3: Why Everybody Trades: Comparative Advantage


Comparative advantage in trade refers to the ability of a country to be involved in economic activities for producing goods more efficiently than any other country. The principle of comparative advantage explains the concept of opportunity costs and any country will export the good having lower opportunity cost. A country will import the goods having higher opportunity cost. The given abstract focuses on the labor and the significance of absolute advantage. The controversies on whether free trade is beneficial or not. Activists and protagonists opined that trade have bad effects on workers of developing countries, natural environment and industrial countries. It is taken as assumption that one country, called, Country N has absolute advantage on all products and other country, called, Country S have absolute disadvantage. When it is assumed that the labor in the assumed Country N is so productive, than workers in another country, Country S is incredulous so that free trade makes Country S poorer. The Country S will have the comparative advantage in few of the set of goods. Production of these set of goods will thrive in Country S. Moreover, starting of trade will lead to the lowering of jobs producing the goods which are imported from Country N. Henceforth, the workers can move to the firms which are export-oriented. On the other hand, there may be some transition cost borne by the workers shifting. The workers must shift from one firm to the other. Country S will gain from the trade, and it will be richer and not poorer. Workers in Country S have low wages which leads to low costs of production and the capacity to export successfully. For the products of comparative disadvantage the large productivity disadvantage is not offset by the low wages as the products are imported from Country N.

Comparative advantage in any country relates that the country will export any service or goods with lower opportunity costs. David Ricardo's theory on international trade among countries is based on opportunity cost. Opportunity cost for producing more of any product in any country is amount of production of the other product that is given up. Adam Smith's theory on absolute advantage says that each country will export product in which the country will have highest labor productivity. The given situation focuses on the labor as productive resource and the significance of absolute advantage considered. The country with high labor productivity will have high export capacity in international trade. The controversies in the given situation relates to the issue, whether free trade will be effective or not. It is assumed that Country N has absolute advantage on all products and Country S have absolute disadvantage. The cost of producing any unit of product is the ratio of the rate of wage paid to the worker and the worker's productivity. The low cost of production causes wages to be low and productivity is high. In the Country S, the comparative advantage of the products for which the productivity is minimum, the lower wages cause low costs of production. Capacity to export becomes more successful. In case of the comparative disadvantage products and high productive disadvantage will not be upset by the lower wages. These products can be imported from Country N. In Country N there is comparative advantage in the group of products as in these products the productivity of absolute advantage is the highest. Although there is high wage, the cost of producing the products is low as the workers are very productive. Country N can export products as high productivity causes low production costs. Through the use of comparative advantage and maximizing the productivity of absolute advantage, Country N will loose from trade and will become poorer. Workers in Country S have low wages. When the wages in the Country S are so low, then will the workers in Country N be overwhelmed, so that free trade makes the Country N poorer.

No, the given statement cannot be agreed upon. Imports refer to buying foreign goods and services by making payments for them while exports refer to selling domestic goods in foreign markets in exchange for money. This means that imports are a type of leakage for the economy as it leads to outflow of money from the economy and exports are a type of injection for the economy as it leads to inflow of money to the economy. This means that exports will increase the GDP while imports will reduce the GDP. Hence, it can be said that imports are an evil while exports are the good thing about international trade. This makes the given statement false.