4 min read•december 27, 2022
Jeanne Stansak
Isabela Padilha Vilela
Jeanne Stansak
Isabela Padilha Vilela
Countries will consequently increase its productions by engaging in trade. However, there are certain conditions that may provide advantages and disadvantages to some countries over others in the production of specific goods. ⚖️
The concepts of absolute and comparative advantage are used to illustrate how individual countries or entities interact and trade with each other. These concepts also focus on how people specialize in what they are good at producing, and how they trade for goods and services that they are not as efficient at producing. Countries aim to gain competitive edge over others in the economy to gain more power in the global market. 🤑
There are two types of problems within these concepts: output and input. Output problems focus on data associated with what each party can produce with a given set of resources, as well as who should specialize in each good. Input problems focus on how much of a resource is needed to produce one unit of a particular good or service.
The rules for these problems are:
Using the table above, we would determine that Japan has an absolute advantage in steel (1200 > 1000) and Canada has an absolute advantage in coal (500 > 300).
The per unit opportunity cost for steel in Canada is 1/2 a unit of coal (500/1000).
The per unit opportunity cost for steel in Japan is 1/4 a unit of coal (300/1200).
Since 1/4 is less than 1/2, Japan has comparative advantage in steel.
The per unit opportunity cost for coal in Canada is 2 units of steel (1000/500).
The per unit of opportunity cost for coal in Japan is 4 units of steel (1200/300).
Since 2 is less than 4, Canada has comparative advantage in coal.
Japan will export steel to Canada and import coal from Canada.
Terms of Trade
Terms of trade are determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries.
Acceptable terms of trade for this situation would be:
The rules for these problems are:
It consists of the ration of a country's export prices to income prices and determines the relative price between that nation's exports and imports.
Terms of trade are determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries.
Acceptable terms of trade for the situation described above would be:
ToT (Terms of Trade) can be influenced by several factors, such as: exchange rates 🔁, changes in prices of raw materials🛢, and shifts in the global demand. 🌏
A favorable terms of trade for a country means that it can purchase more imports for the same amount of exports, which can consequently boost its economy. A country with unfavorable terms of trade has to export more to purchase the same amount of imports, which is damaging to its economy.
Absolute Advantage
: Absolute advantage refers to a situation where one country can produce a good or service more efficiently than another country, using the same amount of resources.Export
: Export refers to goods and services produced domestically that are sold and shipped to other countries. It contributes to a country's economic growth and can improve its balance of trade.Import
: Import refers to goods and services purchased from foreign countries and brought into one's own country for consumption or resale. Imports satisfy domestic demand for products not produced domestically or available at lower prices abroad.Opportunity cost
: Opportunity cost refers to the value of the next best alternative that must be forgone when making a choice between two or more options. It represents what you give up in order to choose something else.4 min read•december 27, 2022
Jeanne Stansak
Isabela Padilha Vilela
Jeanne Stansak
Isabela Padilha Vilela
Countries will consequently increase its productions by engaging in trade. However, there are certain conditions that may provide advantages and disadvantages to some countries over others in the production of specific goods. ⚖️
The concepts of absolute and comparative advantage are used to illustrate how individual countries or entities interact and trade with each other. These concepts also focus on how people specialize in what they are good at producing, and how they trade for goods and services that they are not as efficient at producing. Countries aim to gain competitive edge over others in the economy to gain more power in the global market. 🤑
There are two types of problems within these concepts: output and input. Output problems focus on data associated with what each party can produce with a given set of resources, as well as who should specialize in each good. Input problems focus on how much of a resource is needed to produce one unit of a particular good or service.
The rules for these problems are:
Using the table above, we would determine that Japan has an absolute advantage in steel (1200 > 1000) and Canada has an absolute advantage in coal (500 > 300).
The per unit opportunity cost for steel in Canada is 1/2 a unit of coal (500/1000).
The per unit opportunity cost for steel in Japan is 1/4 a unit of coal (300/1200).
Since 1/4 is less than 1/2, Japan has comparative advantage in steel.
The per unit opportunity cost for coal in Canada is 2 units of steel (1000/500).
The per unit of opportunity cost for coal in Japan is 4 units of steel (1200/300).
Since 2 is less than 4, Canada has comparative advantage in coal.
Japan will export steel to Canada and import coal from Canada.
Terms of Trade
Terms of trade are determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries.
Acceptable terms of trade for this situation would be:
The rules for these problems are:
It consists of the ration of a country's export prices to income prices and determines the relative price between that nation's exports and imports.
Terms of trade are determined by looking at the two opportunity costs and choosing a number that falls between the opportunity costs in order for it to be beneficial to both countries.
Acceptable terms of trade for the situation described above would be:
ToT (Terms of Trade) can be influenced by several factors, such as: exchange rates 🔁, changes in prices of raw materials🛢, and shifts in the global demand. 🌏
A favorable terms of trade for a country means that it can purchase more imports for the same amount of exports, which can consequently boost its economy. A country with unfavorable terms of trade has to export more to purchase the same amount of imports, which is damaging to its economy.
Absolute Advantage
: Absolute advantage refers to a situation where one country can produce a good or service more efficiently than another country, using the same amount of resources.Export
: Export refers to goods and services produced domestically that are sold and shipped to other countries. It contributes to a country's economic growth and can improve its balance of trade.Import
: Import refers to goods and services purchased from foreign countries and brought into one's own country for consumption or resale. Imports satisfy domestic demand for products not produced domestically or available at lower prices abroad.Opportunity cost
: Opportunity cost refers to the value of the next best alternative that must be forgone when making a choice between two or more options. It represents what you give up in order to choose something else.© 2024 Fiveable Inc. All rights reserved.
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