Chapter 5

As most already know, the Swiss are renowned for their production of high quality chocolates including those of the Toblerone and Lindt brands. “Switzerland has a comparative advantage in the production of chocolate. By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate. Thus, the good in which comparative advantage is held is the good that the country produces most efficiently (chocolate). Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good in which it holds the comparative advantage, and by trading for the other good.” (Globalization101.org, 2010)

Trade-offs play a significant role in every economic agreement. It is impossible for each nation to produce a sufficient amount of each good necessary to maintain its population, making trade an integral part of societal function. In theory, specialization leads to

B. the differences between countries in terms of tariff rates, and the differences between the countries in

Comparative advantage is determined by the “price” of one good in terms of the other good within each country.

b. the ability of a country to produce a good more efficiently than another nation.

“Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.”

Modernization in particular approaches this focus on competition in a global economy through the promotion of trade specialization. The intent of this is to allow countries to gain an edge in the market by concentrating their efforts on one primary export, such that they may become larger

Under the globalization, it is very rare and costly for a country to produce everything she needs; the variations of productive factors allow countries to produce in their comparative advantages and trade with each other. In this way, countries should know how to allocate their resources efficiently to achieve optimal result during time in trade.

    C. what benefit are to be gained from counties producing according to the concept of comparative advantage? What it a country is absolutely more productive in all good.

A) it increases competition in the domestic market of each country at the expense of external suppliers and, accordingly, limits the monopoly of national producers;

Smith’s assumption of invisible hands of the market was subjected to criticisms from the second half of the nineteenth century. Some of the critics were related to the situation in which two countries might benefit from trade with each other although one holds an absolute advantage over the other in the production of all goods. The explanation of this situation became known as the “theory of comparative advantage”. According to Ricardo if a country does not have an absolute advantage in any good, this country and all other countries would benefit from international trade, in which each country specializes in the production of those goods in which they have the greatest absolute advantage or the least absolute disadvantage (Husted & Melvin, 2007, pp. 60-61).

Absolute advantage is defined as the capacity of a nation, individual, company or region to produce a good or at a lower expense or costs every unit than the cost at which any other

The theory encourages economies, especially the developing ones, to pursue policies that may be harmful. The fundamental objective of Competitive Advantage of Nations (CAN) was to explain why some ‘social groups, economic institutions and nations advance and prosper’ (Porter, 1990). He

The concept of comparative advantage refers to countries' ability to produce certain products and services at lower marginal costs in comparison with other countries. This concept is in strong relationship with international trade. This is because countries prefer to trade with each other the products and services that provide them with comparative advantage. For example, if a country can produce wine at lower costs, but produces clothes at higher costs, that country should trade its excess wine for the clothes produced by another country at lower costs, and that requires that wine, because it cannot produce it at such lower costs.

Accordingly, a country has a comparative advantage in the production of a good whether the opportunity cost of its production is lower than in the other country (Salvatore, 2012).