MARKET BEHAVIOR

Market Behavior

Market Behavior

Comparative Advantage

Comparative advantage is one of the principal ideas used in economics to explain the potential for gains from trade between countries. The theory of comparative advantage—developed by 19th-century economist Robert Torrens but usually attributed to David Ricardo—asserts that a country should focus on producing those goods it can make most efficiently while importing goods which the country can make relatively less efficiently. (Kathleen, 1996) This is true even if one country has an absolute advantage in producing all goods in question i.e., if it can produce all goods using fewer resources than other countries.

Absolute Advantage

One simplistic view of world trade would be to expect that whatever country is “better” at producing a good in some absolute sense will end up specializing in the production of that good. Was this the case, it would spell bad news for poor developing countries considering opening up their borders to free trade. Because industrialized countries such as the United States have high levels of productivity across all sectors, a less technologically advanced developing country would have no hope of competing in a free trade environment if absolute productivity levels were all that mattered. (Caves, 1996) For example, consider the United States and Mexico. Suppose that one laborer using U.S. technology can produce a computer in 2 hours of work. That same person working with U.S. agricultural technology can harvest a bushel of corn in 1 hour. Now suppose that in Mexico, producing a computer takes a person 12 hours, and harvesting a bushel of corn takes 3 hours. In this example, Mexico is slower at producing both computers and corn. We say that the United States has an absolute advantage in producing both goods because it can produce each of them at a lower cost than Mexico.

Q.2

Example:

Suppose the USA and Canada are considering to trade. Assume there are only two goods in the economy: wheat and corn. Wheat Corn in USA 4 2, whereas, in Canada 5 8.

After calculating the opportunity cost for each of the countries it was found out that Canada should produce wheat. For instance, if we see, USA can produce 2 units of corns and 4 units of wheat and Canada can produce 5 units of wheat and 8 units of corn. If USA produces one unit of corn, then it has to give up 2 units of wheat. That is why it is feasible for Canada to produce wheat.

Q.3

Production Possibilities Frontier:

The set of combinations of factors of production or technology in which maximum production is reached. It reflects the maximum quantities of goods and services that a company can produce in a given period and from some factors of production and know-dice. So there are three situations in a country's productive structure: (Richard, 1999)

* Inefficient productive structure: When you are under the FPP, that is, or not used all the resources (idle resources), or the technology is not adequate (improved technology).

* Efficient production structure: It is situated on the border or close to ...