Q

Use the prior definitions of absolute and comparative advantage to assist with your answer

Home, - Define absolute and comparative advantage

Question 1 - a. Define absolute advantage and comparative advantage.

Answer -

Absolute advantage shows the inherent ability of a country to produce particulars goods at comparatively lower marginal cost than another country in efficient manner. Under such concept, the both countries may not be mutually benefitted.

Comparative advantage shows the inherent ability of a country to produce particulars goods at comparatively lower opportunity cost and marginal cost than another country in efficient manner. Under such concept, the both countries are mutually benefitted.

b. Explain why Japan exports automobiles, while the U.S. exportsaircraft? Use the prior definitions of absolute and comparative advantage to assist with your answer.

Answer -

Japan exports automobiles while US exports aircraft because of absolute advantage or comparative advantage.

Japan exports automobile to rest of the world because either it can produce automobiles at lower marginal cost or lower opportunity cost. Due to such cost leadership, it achieve higher efficiencies in producing automobiles when compared with US.

Similarly, US exports aircarfts to rest of the world because either it can produce aircrafts at lower marginal cost or lower opportunity cost. Due to such cost leadership, it achieve higher efficiencies in producing aircrafts when compared with Japan.

Question 2 - a. Explain how an export subsidy is theoretically meant to work. Think of the application to "infant industry".

Answer -

The "infant industry" means such industry which require protection from international competition as they are in early stage, non-stable as well as non-competitive. The government should promote domestic trade protectionism to protect the infant industry from extreme competition from large scale entities. It is not possible for theinfant industry to compete with large scale business due to cost savings. Economies of scale, amss production etc. Thus, the government should provide adequate export subsidy to the infant industry to make them competitive in the outside world and capable of matching the efficiencies of large scale companies.

b. Why is it that most of these industries do not generate the overseas revenue and domestic profits and employment that were promised?

Answer -

The reasons due to which most of these industries do not generate the overseas revenue and domestic profits and employment that were promised due to the following reasons:

1. They generally charge a comparatively higher price for their product when compared with the large scale companies and therefore the demand of products from suc industry reduces significantly. Due to such higher price and comparatively lower demand, the revenue generation is also quite lower

2. The cost of production of products for such industry is comparatively higher than large scale companies due to which the profit margin is lowered down and therefore, the profitability of such industry.

3. Due to lower demand of products from such industry, they are not able to expand production capacity beyond a certain limit and therefore cannot generate sufficint employment opportunities as was promised before.


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