Chapter three explained why trade was more beneficial than self-sustenance. Even though a party has absolute advantage, they can also gain from interdependence. Originally, I thought that someone with absolute advantage would not want to trade (since there would be the most outputs in a limited time frame). What I did not understand was that trade is based on comparative advantage. Sure, someone with absolute advantage will produce more outputs; however this does not mean there is an efficient balance in opportunity costs. Through trade, this does not become a problem; each party can focus on the production of a good with the least opportunity cost, thus being able to trade greater amounts.
Some questions I have for this chapter are the following:
1.) I see how quantity is a main factor of the production possibility frontier. Does quality also play a role, as I am sure it affects trade? (Though quality may be immeasurable)
2.) The book stated that for both parties to gain from trade, the price at which they trade must lie between the two opportunity costs. How would you compare the two opportunity costs, between say, the farmer (who produces 1 oz potatoes at 1/4 oz of meat) and an urban worker who wants to purchase the potato but does not produce the same goods? (that would serve as a comparison)
3.) "International trade can make some individuals worse off...but greater prosperity for all countries." Will the greater prosperity of the nation help in the long-run the automaker that was put out of business (in the example that the U.S. should focus on food production instead of auto)?
No comments:
Post a Comment