1. Describe the difference between absolute advantage and comparative advantage. Suggested solution: Absolute advantage means that a...

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Question:

1. Describe the difference between absolute advantage and comparative advantage.

Suggested solution: Absolute advantage means that a country can produce more of a good than other countries because of resource differences, such as greater population or more raw materials. Comparative advantage means that a country gives up less of one good to specialize in another good than does a potential trading partner. Comparative advantage explains patterns of trade. Countries specialize in goods in whose production they have a comparative advantage and trade those goods for goods in which other countries have a comparative advantage. (Answers may vary.)

Question

2. In the table, which country has a comparative advantage in the production of automobiles, and how has this been determined?
MAXIMUM PRODUCTION OF: GERMANYSWITZERLAND 100 CARS WATCHES 20 1 600 5000

Suggested solution: Germany has a comparative advantage over Switzerland in producing autos. The table provides the maximum output in either country assuming all of the country’s resources are devoted to the production of either watches or cars. To produce a car, Germany has to give up only 50 watches (5,000/100 = 50; each car costs 50 watches). Switzerland, on the other hand, has to give up 80 watches (1,600/20 = 80; each car costs 80 watches) to produce a car. Germany’s opportunity cost in terms of watches to produce a car is lower; therefore, it has a comparative advantage over Switzerland in the production of cars. (Answer may vary.)

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3. Why is international trade sometimes restricted with barriers such as tariffs or quotas?

Suggested solution: While free trade benefits a society overall, some segments of the economy may be harmed by trade. For example, the United States used to have a large furniture-making industry. With free trade, much of this manufacturing has moved to low-wage countries such as India and China, reducing the financial viability (and employment levels) of producing furniture in the United States. Domestic furniture businesses and their employees might respond by lobbying Congress to pass restrictive tariffs and quotas targeted at reducing the harm of trade to this segment of the economy.