Question

4) You just overheard your friend say the following: “Poor countries
like Malawi have no absolute advantages. They have poor soil, low
investments in formal education and hence low-skill workers, no
capital, and no natural resources to speak of. Because they have no
advantage, they cannot benefit from trade.” How would you respond?

Answer 1

I would agree that poor countries like Malawi have an absolute disadvantage in all the resources because of their poor resource base, low skill levels, and poor technology. However, they can still benefit from trade because even in the absence of absolute advantage in any resource, it may enjoy comparative advantage in certain resources. This is because the opportunity cost of using a particular resource in terms of other resources given up by the country may be lower for it than other countries. For instance, poor countries usually have abundant labour and the opportunity cost of using labour resources is usually low for these countries. Therefore, they would have comparative advantage in some resources through which they can benefit from trade. For instance, they may use their cheap labour to produce labour intensive imports at low costs and sell them at competitive prices in the global market.