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1.They import those that they need but don’t produce and export those that are needed elsewhere.2.To understand why certain countries import or export certain products, you need to realize that not all countries are good at producing or are able to produce the same products.3.The cost of labor, the availability of natural resources, and the level of know-how vary greatly around the world.
•To explain how countries decide what products to import and export, economists use the concepts of absoluteand comparative advantage.1.A nation has an absolute advantage if it’s the only source of a particular product or can make more of a product with the same amount of or fewer resources than other countries.2.A comparative advantage exists when a country can produce a product at a lower opportunity costthan other nations.•Nations trade to exploit their advantages: they benefit from specialization, focusing on what they do best and trading the output to other countries for what theydo best.•To evaluate the impact of its international trade, a nation looks at two key indicators: balance of trade and balance of payments.•We determine a country’s balance of trade by subtracting the value of its imports from the value of its exports.1.If a country sells more products than it buys, it has a favorable balance, called a trade surplus.2.If it buys more than it sells, it has an unfavorable balance, or a trade deficit.•The balance of payments is the difference, over a period of time, between the total flow coming into a country and the total flow going out.1.As in its balance of trade, the biggest factor in a country’s balance of payments is the money that comes in and goes out as a result of exports and imports.2.But balance of payments includes other cash inflows and outflows, such as cash received from or paid for foreign investment, loans, tourism, military expenditures, and foreign aid.EXERCISES1.(AACSB) Analysis
We use the concepts of absolute and comparative advantage to explain why countries import some products and export others. We can also use them to explain how work can be divided between two persons. Two consultants—Jennifer and John—have a client who needs a company report written and a PowerPoint presentation prepared within the next two weeks. Both Jennifer and John have experience writing reports and preparing presentations, but neither has the time to do both jobs. From past experience, they know how much time each of them needs to complete each type of project:ConsultantWrite a reportPrepare a presentationJohn80 hours40 hoursJennifer150 hours60 hoursUsing the information contained in the grid above, answer each of the following questions:1.Does either John or Jennifer have an absolute advantage in (1) writing reports and/or (2) preparing presentations?