iNTERNATIONAL tRADE - CHAPTER 2 - Fundamental Issues 34...

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Unformatted text preview: Fundamental Issues 34 CHAPTER TWO Comparative Advantage— How Nations Can Gain from International Trade 1. What are a nation’s production possibilities, and what do they tell us about the costs of producing goods and services within that nation? 2. What is absolute advantage, and how can it help explain why nations engage in international trade? 3. Why is absolute advantage alone insufficient to account for trade among nations? 4. What is comparative advantage, and how does it allow countries to experience gains from trade? 5. Why, in spite of its benefits, does international trade ebb and flow and create so much controversy within the world’s nations? For many generations, Hindu blacksmiths scratched out a living pounding copper into pots, jars, and jugs in the village of Setipokhari, located in the Himalayan foothills of Nepal. Then, the twentieth century arrived, and mass- produced aluminum and plastic containers crowded out their products in the world marketplace. Although the artisans of Setipokhari continued to teach their children the art of metalworking, many gave up their craft and moved to India to find gainful employment. Enter the twenty-first century. At the beginning of 2000, copper items produced in Setipokhari began appearing alongside sweaters knitted by Peru- vian villagers and pyramid candle holders handcrafted in Morocco on the Web site This site is the retail marketing arm of, which provides an infrastructure for skilled workers in de- veloping countries to access the global electronic marketplace. It is one of a growing number of Web sites that sell home furnishings, gifts, accessories, 2618-CH02 10/15/02 10:26 AM Page 34 and toys made by traditional craftspeople around the world. Most of the buyers of these various wares are Web surfers in the United States. There is not a single telephone in Setipokhari, but the Internet has dra- matically improved the lives of its inhabitants. Copper workers can now earn 150 to 300 rupees per day, or about $2.30 to $4.60. This may not seem like much, but it is about twice the average daily wage of a typical blue- collar worker in Nepal. The metal crafters’ families now cook on gas stoves instead of over open fires, and they receive child-education and retirement benefits—employment benefits previously unknown to residents of Seipokhari. N epal is one of the world’s poorest countries. The dollar value of the goods and services produced by a typical resident of Nepal is less than 1 percent of the value of the goods and services produced by a typical U.S. resident. This reflects the fact that the productive capabilities of the United States dwarf those of Nepal. Yet a number of U.S. Web surfers are buying copper goods pro- duced by Nepalese artisans instead of those made by blacksmiths based in the United States. What lies behind this flow of trade from one of the world’s smallest economies to its largest economy? After you read this chapter, you will know theeconomies to its largest economy?...
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iNTERNATIONAL tRADE - CHAPTER 2 - Fundamental Issues 34...

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