01:220:102 Study Guide - Final Guide: Factor Endowment, Autarky, Absolute Advantage

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8 May 2019

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01:220:102 Full Course Notes

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Unit 3 notes: most of what the final is going to be on. Countries will specialize in goods they can produce more cheaply than other countries (lower opportunity cost) Autarky- a situation in which a country does not trade with other countries. **countries will export goods above their cost of production, and import goods below their costs of production. The advantage in the production of a good enjoyed when a country uses fewer resources to produce a good than another. The ability of a party to produce a greater quantity of good compared to competitors using the same amount of resources. Factor endowments- the quantity and quality of land, labor, and natural resources of a country. Heckscher-ohlin theorem- a theory that explains the existence of a country"s comparative advantage by its factor endowments. A country has a comparative advantage in the production of a product if that country is relatively well downed with inputs used intensively in product production.

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Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

The law of comparative advantage states that:

a. each country should specialize in producing the good with the lowest opportunity cost.

b. a country that is able to produce something using fewer resources than other countries would gain from specialization and trade.

c. international trade barriers slow the introduction of new goods and better technologies.

d. countries can gain from trade if production is subject to economies of scale.

e. countries must agree on how much of one good exchanges for another.

turquoiseferret638

The fundamental force driving international trade is comparative:

A. Advantage: a country exports those goods that have high prices

B. Abundance: the country that produces more than it needs exports the good

C. Advantage: the country with the lower opportunity cost of production exports the good

D. Cost: a country trades with other countries that produce cheaper goods

goldcheetah814

01:220:102 Study Guide - Final Guide: Factor Endowment, Autarky, Absolute Advantage

01:220:102 Full Course Notes

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