Answer to Question #272656 in Macroeconomics for Cmd

Question

1. Differentiate between Absolute cost and Comparative cost advantage theories of International trade.

2. Explain reasons why countries engage themselves in trade.

3. Explain the range of trade protection instruments use in Nigeria.

4. Explain the main components of Balance of Payments.

5. Consider the following situation for Upland and Downland. Each country half of its resources in Banana and half in Apple.

Apple Banana

Upland 450 80

Downland 60 60

a. Does the figure represent Absolute or Comparative advantage or both?

b. What is the opportunity cost of apple for each country?

c. By how much will total output increase when the countries ( Download and Upland) specialize.

Answer 1

1. Absolute advantage refers to the ability to produce more or better goods and services than somebody else. Comparative advantage refers to the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume or quality.

2. The five main reasons international trade takes place are differences in technology, differences in resource endowments, differences in demand, the presence of economies of scale, and the presence of government policies.

3. Nigeria employs a combination of tariffs and quotas for the double purpose of taxing international trade for revenue generation and protecting local industries from highly competitive imports.

4. There are three components of balance of payments: current account, capital account, and financial account.

5. a. The figure represent both Absolute and Comparative advantages.

b. The opportunity cost of apple in Upland is: 80/450 = 0.178.

The opportunity cost of apple in Downland is: 60/60 = 1.

c. If the countries specialize, then Upland will produce 900 apples and Downland will produce 120 bananas, compared with 510 apples and 140 bananas previously.