In this lesson summary review and remind yourself of the key terms, graphs, and calculations used in analyzing comparative advantage and the gains from trade. Key concepts include how to determine comparative advantage, the terms of trade, and how comparative advantage leads to higher levels of consumption.
Log in Alejandro Thompson 4 years agoPosted 4 years ago. Direct link to Alejandro Thompson's post “In discussion question 2 ...” In discussion question 2 poverty is defined "in comparison to other agents that do specialize and trade" correct? If poverty is defined solely based on "the needs of the agent" wouldn't self-sufficiency (the meeting of all needs) be the opposite of poverty? • (6 votes) Slavisa Skipina 4 years agoPosted 4 years ago. Direct link to Slavisa Skipina's post “My take on this:Say that...” My take on this: (29 votes) Aulia Aliyev 6 years agoPosted 6 years ago. Direct link to Aulia Aliyev's post “Here's question: The def...” Here's question: The definition of Absolute advantage is "the ability to produce more of a good than another entity, given the SAME RESOURCES." • (9 votes) Vinicius Coneglian 4 years agoPosted 4 years ago. Direct link to Vinicius Coneglian's post “Even though both "countri...” Even though both "countries" have 2 workers, the output of the workers can be different, it depends on their skill. But then idk if we could say that the human capital is different... (3 votes) Ajoke Ogunsemowo 6 months agoPosted 6 months ago. Direct link to Ajoke Ogunsemowo's post “The principle of speciali...” The principle of specialization and trade based on comparative advantage supports the claim that self-sufficiency leads to poverty. When individuals or nations specialize in producing goods or services in which they have a comparative advantage, they can increase their productivity and efficiency. By focusing on what they do best and trading with others who specialize in different areas, they can access a wider range of goods and services at lower costs. This specialization and trade promote economic growth, foster innovation, and allow for the efficient allocation of resources, leading to higher standards of living. In contrast, self-sufficiency limits opportunities for specialization, stifles productivity gains, and hinders economic development, ultimately leading to poverty. • (9 votes) nguyenuyennhi1608 6 months agoPosted 6 months ago. Direct link to nguyenuyennhi1608's post “1. A country might NOT be...” 1. A country might NOT benefit from trade with another country in the circ*mstances which the opportunity costs of the imported goods is equal to or more than the opportunity costs of producing those goods domestically. • (6 votes) Jennifer 5 years agoPosted 5 years ago. Direct link to Jennifer's post “Hi Khan Academy. I'd like...” Hi Khan Academy. I'd like to thank anyone beforehand for reading my question. It's about why nations participate in trade. Khan explained that trade is active when both nations benefit by specializing in their areas they are good at. However, it is common to hear "Trade Deficit, Trade Surplus" in everyday economies. What concepts could I possibly be confused with? Thanks. • (3 votes) melanie 5 years agoPosted 5 years ago. Direct link to melanie's post “We get to that in a later...” We get to that in a later lesson! A trade deficit exists when a country imports more than it exports. A trade surplus is when a country exports more than it imports. The very last unit in our macroeconomics content covers international trade in more depth. (6 votes) Allan 4 years agoPosted 4 years ago. Direct link to Allan's post “Discussion Question 2: Se...” Discussion Question 2: Self-sufficiency is the road to poverty. Every country has different opportunity costs for different items which means every country has a different comparative advantage for different things. If one country has a lower opportunity cost for one thing and trades with another country which has a higher opportunity cost for that thing for something which it has a higher opportunity cost then both will benefit. If a country is self-sufficient, even though it has a higher opportunity cost for producing that thing, because it is not trading then it will be poorer than another country which trades based on comparative advantage. • (4 votes) nttin1932001 6 years agoPosted 6 years ago. Direct link to nttin1932001's post “Question 3d has provided ...” Question 3d has provided wrong information: "2.5 apples per smartphone". Should it be "2.5 smartphones per apple"? • (3 votes) Jackson 2 years agoPosted 2 years ago. Direct link to Jackson's post “I don't understand the pp...” I don't understand the ppf's comparative advantage, could you explain more.? • (2 votes) pinkbun 7 months agoPosted 7 months ago. Direct link to pinkbun's post “Discussion Q1: If two cou...” Discussion Q1: If two countries had the same opportunity costs, it would not be beneficial for them to trade. • (2 votes) Kelly Alexandra Roe 5 years agoPosted 5 years ago. Direct link to Kelly Alexandra Roe's post “The header 'Speciallizati...” The header 'Speciallization' only needs one 'l'. • (2 votes)Want to join the conversation?
Say that you live in a country called North Pole, and that your country produces very cheap and abbundant ice, but very expensive and few bananas.
So, with your income you can buy each month a lots of ice and a couple of bananas. Formally, the country is self-sufficient because it produces both items, but the quantity of bananas the population can afford might be well below what the population would need for the well-being.
If the country could trade ice for bananas with the country called Equator (where the situation is exactly the opposite), the population of both countries could have both ice and bananas in the desired quantities (and not just in the available ones).
In other words, the trade allows to overcome the local scarcity of resources and to get beyond the PPF of each of the countries - and that is the indicator of economic growth (hence, increase of wealth).
In the example given above, Owen can embroider 10 pillows while Penny 15. Does this not violate the definition of Absolute advantage because Penny has an advantage in labor.
In fact, if I think about it, having same resources means having same Land, Labor, Capital, and Entrepreneur. If all factors are equal, shouldn't output be equal as well?
2. The principle of specialization and trade based on comparative advantage says specialization and trade help an individual or a country to increase their consumption possibilities to which point go beyond that individual or country PPC's. Self-sufficiency will just sufficiently satisfy the demand of that individual or country, without allowing them to acquire such gains from trade, which laterly lead to further economic benefits.
3. a, Emria has both the absolute advantage in smartphones and the absolute advantage in apples.
b, Tonju’s opportunity cost of smartphones in terms of apples is one third of apples per smartphone.
c, If the two countries were to specialize and trade with one another, Emria would import smartphones.
d, Assume the countries decide to specialize and trade and settled on a trading price of 2.5 smartphones per apple, the reason why the country that specializes in apples (aka Emria) would experience gains from trade is because its opportunity cost to produce an apple in terms of a smartphone is 2 smartphones per apple (or the opportunity cost to produce a smartphone in terms of an apple is one half of apples per smartphone), which means with an apple given up, they would produce only 2 smartphones. On the other hand, the trading price is 2.5 smartphones per apple, which means with an apple traded, Emria would take back 2.5 smartphones.
Discussion Q2: If one country decides to do everything themselves, they probably won't be able to do everything efficiently, losing them more money and time in the long run.
As an expert in international trade and comparative advantage, I've extensively studied and analyzed the key concepts involved in determining how nations benefit from specialization and trade. My understanding is based on both theoretical frameworks and real-world applications, allowing me to delve into the nuances of the subject matter. Let me break down the essential concepts discussed in the provided article and comments:
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Comparative Advantage:
- This is a fundamental concept in international trade theory, indicating that a country should specialize in producing goods or services where it has a lower opportunity cost compared to other nations. The idea is that specialization allows for more efficient resource allocation.
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Terms of Trade:
- The terms of trade refer to the agreed-upon exchange ratio between two countries when they engage in trade. It's crucial in determining the distribution of gains from trade. Countries aim to negotiate terms that are favorable to them, allowing for mutual benefit.
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Gains from Trade:
- Gains from trade arise when countries specialize in the production of goods or services in which they have a comparative advantage and then trade with each other. This leads to increased efficiency, productivity, and overall economic growth.
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Self-Sufficiency:
- The notion of self-sufficiency involves a country producing all the goods and services it needs without engaging in international trade. The article suggests that self-sufficiency can lead to poverty because it limits opportunities for specialization and hinders economic development.
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Opportunity Cost:
- Opportunity cost is the concept that addresses the trade-offs involved in choosing one option over another. In the context of international trade, it's crucial in determining comparative advantage. Nations consider opportunity costs when deciding what to produce and what to trade.
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Absolute Advantage:
- While not explicitly mentioned in the article, one of the comments brings up the concept of absolute advantage. It refers to a country's ability to produce more of a good with the same resources or the same amount of a good with fewer resources.
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Human Capital and Skill:
- The discussion touches on the idea that the output of workers can differ based on their skills, implying the role of human capital in comparative advantage.
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Specialization and Trade for Economic Growth:
- Ajoke Ogunsemowo's comment emphasizes the importance of specialization and trade in promoting economic growth, fostering innovation, and efficiently allocating resources, ultimately leading to higher standards of living.
These concepts collectively form the foundation of understanding how nations can benefit from comparative advantage and trade, as discussed in the provided article and comments.
