Absolute and comparative advantage are defined and explained with the use of examples. One source of comparative advantage is a pure technological difference between countries. What do you see as other differences that might drive comparative advantage? Reflect on concrete examples from countries that you might be familiar with, and indicate them along with your response.
1. The theories of absolute and comparative advantage focus on production efficiency or productivity. Despite their powerful predictive capabilities, these theories are limited. What are the considerations that might limit the extent to which these theories are realistic?
2. In the 1980s (and to a certain degree again today), many people (mostly blue-collar workers rather than professionals and highly educated workers) recommended restrictions on imports. Is this a shortsighted policy or a rational one in view of the interests of union members? How does the answer depend on the model of trade?
3. Consider the following table on labor hours needed to produce one unit of output for two different goods in two different countries
United States
France
Computer
60
50
Wine
20
25
a. The opportunity cost of a computer in France is __________.
b. The opportunity cost of a computer in the United States is __________.
c. The opportunity cost of one unit of wine in France is __________.
d. The opportunity cost of one unit of wine in the United States is __________.
e. France possesses comparative advantage in the production of __________.
f. The United States possesses comparative advantage in the production of __________.
4. How does the existence of non-tradeable goods affect the extent of potential gains from trade? In length.