Questionnaire

Absolute Advantage and Comparative Advantage

While a nation can conceivably have a sufficient variety of production factors to provide every kind of product and service, it cannot produce each product and service with equal facility. For instance, the United States could produce all the coat hangers that its citizens need. Importantly, producing coat hangers requires much labor, and wages in the United States are relatively high compared to other countries. On the other hand, the coat hangers could be produced in China as well, where wages are lower than in the United States. Additionally, the United States can specialize in producing pharmaceutical products in which there are abundant knowledge workers and technology. Likewise, pharmaceutical products report a relatively much higher and competitive profit. Finally, China tends to fall behind the United States concerning the pharmaceutical industry. Requirements

1. Based on the previously described situation, which product should The United States specialize in producing and exporting, and which product should The United States import? Explain.

2. Based on the previously described situation, which product should China specialize in producing and exporting, and which product should China import? Explain.

3. In terms of a country, is specializing associated with economic activity or with social welfare? Explain.

4. In terms of a country, is trading associated with economic activity or with social welfare? Explain.

5. Does the situation described above relate to absolute advantage or comparative advantage? Explain.

6. Should countries import products which cost of domestic production is higher or lower than the products price in foreign markets? Explain.