Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
Question
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Chapter 18, Problem 1CQ
To determine

The purchase and sale of goods between Country A and other countries.

Expert Solution & Answer
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Explanation of Solution

Every economy has their own natural resources, which are being used for the production of goods and services for the society. The productivity of each factor would be different in different economies. Thus, the economies should identify whether they have absolute advantage or comparative advantage in the production of a commodity. Absolute advantage is the ability of a country to produce a commodity or service using the same or fewer resources than the other countries. Comparative advantage is the advantage to produce a commodity at a lower opportunity cost than the other countries.

Thus, according to the advantage theory of nations, it suggests that every economy should focus their production on goods and services for which they have comparative advantage than the others. This process is known as specialization. An economy can produce more because of this and the excess after domestic need can be exported to other economies in exchange for the commodities for which the economy does not have comparative advantage. This is the reason why Country A’s households and businesses buy things from foreigners. Country A’s economy imports the goods for which it does not have comparative advantage, whereas exports the items for which it has comparative advantage.

The goods for which Country A’s economy has comparative advantage is in the case of the capital goods such as automobiles, computers, semi-conductors, telecommunication equipment, and so forth. Other major exports include the civilian aircrafts, electrical equipment, and chemicals. The imports are the commodities for which Country A’s economy has comparative disadvantage of production. It includes crude oil, textiles, sporting goods, diamonds, motorcycles, and so forth.

Economics Concept Introduction

Comparative advantage: Comparative advantage is the advantage to produce a commodity at a lower opportunity cost than other countries.

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