Chapter 18.1, Problem 1R

To determine

To discuss: About imports, exports, absolute advantage, specialization and comparative advantage.

Explanation of Solution

Imports: Goods or services that have been purchased from other countries by the home country are referred to as imports. When a country’s imports are more than its exports then the country is said to have negative net exports.

Exports: Goods produced in domestic market and sold, or services that have been rendered, by home country to other countries are referred to as exports. When a country’s exports are more than its imports then the country is said to have positive net exports.

Absolute advantage: It refers to the advantage of producing more goods with same or less quantity of inputs or time that other firms producing same service or goods. For example, if country A can produce 12 cars and 6 bikes while country B can produce 6 cars and 12 bikes with same population and resources then country A will have an absolute advantage in producing cars while country B have an absolute advantage in producing bikes.

Specialization: It means a country have a tendency to produce the product they have specialization in surplus and trade for other goods instead of producing all consumption goods. For example, country A has specialization is producing good 1 than good 2 and good m. In such a scenario, the country A may produce good 1 in surplus trade with countries for good 2 and good 3.

Comparative advantage: It refers to the advantage of producing a goods at lower opportunity cost when compared to its trading partners. For example, country ABC takes 10 hours in producing bread and 5 hours in producing bacon while country XYZ takes 8 hours in producing bread and 2 hours in producing bacon. Here, country ABC will have to give up 2 bacon to produce one bread while country XYZ will have to give up 4 bacon to produce one bread so country ABC has comparative advantage in producing bread. On the other hand, country ABC will have to give up 0.5 bread to produce one bacon while country XYZ will have to give up 0.25 bread to produce one bacon so country XYZ has comparative advantage in producing bacon.