ECON 3150 Chapter Notes - Chapter 1-15: Monopolistic Competition, Trade Route, Absolute Advantage
Document Summary
Because some countries are relatively better at producing certain goods (because of natural resources, climate, capital and labour endowments, and technology) => will have relatively cheaper prices of these goods => trade is beneficial. Differences in the cost of offshoring (i. e. producing the various parts of a good in different countries and then assembling it in a final location) Lw: production functions c = mpl . Absolute advantage: when a country has the best technology for producing a good, it has absolute advantage in the production of that good. Comparative advantage: absolute advantage is not a good explanation for trade patterns. Instead, comparative advantage is the primary explanation for trade among countries. A country has comparative advantage in producing those goods that it produces best compared with how well it produces other goods. This means that even countries with poor technologies can export the goods in which they have comparative advantage: all countries experience gains from trade.
