Question

Question 1: Explain with your example that how a country with absolute advantage in its production of two goods can gain from trade from another country which has no comparative advantage on the same goods. Chapter 3 (Interdependence and the Gains from Trade)

Question 2: By explaining law of demand and law of supply show how prices of goods and services are determined in all types of market? What are those forces that move a market towards equilibrium? Why it is not advisable for any government of rely on price floor and price ceiling? Chapters 4 & 6 (The Market Forces of Supply and Demand & Supply, Demand, and Government Policies)

Question 3: What are the main influences on the elasticity of demand that that makes the demand for some goods elastic and demand for another goods inelastic? What are the main influences on the elasticity of supply that make the supply of goods elastic and the supply of other goods inelastic? Chapter 5 (Elasticity and its Application)

Note: Answers should be written with appropriate headings. You may also draw figures to answer your questions more clearly.

Answer 1

            Answer to Question 1)

For answering the question, we need to understand the meaning of comparative advantage and absolute advantage at the same time. Comparative advantage is a situation in which a country can produce goods at a lesser opportunity cost than the other market players. It arises due to various factors such as abundance of land, low skill labour etc. For example, India can produce IT enabled services at a very low opportunity cost as the next best alternative in the country is low skill manufacturing or farming which has a very low opportunity cost.

In comparison, absolute advantage happens due to an advantage up and above any other competitor in the market. This is not between two countries but of the entire market. For example, Gulf countries have an absolute advantage in producing oil as they have abundance of this natural resource and no other country can produce the same as the Gulf countries do.

Now coming to the examples of the case study.

We find that United States has abundance of technology and as such has an edge over other countries when it comes to designing and manufacturing high tech equipment such as weapons and planes for an example. No other country in the world has a comparative advantage as they lack the technology to be able to produce the same. Therefore, if the United States produces and exports these goods as it currently does, it gains extremely high from such transactions as no other country can produce the same quality and the country may charge additional profits from the same.

Such situations allow countries to become a monopoly and trade with others till other countries develop the required technology which in itself would take several years.

Please feel free to ask your doubts in the comments section if any.