...iess_Batch4_A-L 5/11/07 11:14 AM Page 1 A–L ABSOLUTE AND COMPARATIVE ADVANTAGE During the seventeenth and eighteenth centuries the dominant economic philosophy was mercantilism, which advocated severe restrictions on import and aggressive efforts to increase export. The resulting export surplus was supposed to enrich the nation through the inflow of precious metals. Adam Smith (1776), who is regarded as the father of modern economics, countered mercantilist ideas by developing the concept of absolute advantage. He argued that it was impossible for all nations to become rich simultaneously by following mercantilist prescriptions because the export of one nation is another nation’s import. However, all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage. Table I, illustrating Smith’s concept of absolute advantage, shows quantities of wheat and cloth produced by one hour’s work in two countries, the United States and the United Kingdom. Division of labor and specialization occupy a central place in Smith’s writing. Table I indicates what the international division of labor should be, as the United States has an absolute advantage in wheat and the U.K. has an absolute advantage in cloth. Smith’s absolute advantage is determined by a simple comparison of labor productivities across countries. Smith’s theory of absolute advantage predicts that the United States will produce only wheat (W) and the U...
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...Journal of Information, Control and Management Systems, Vol. 5, (2007), No. 2 331 RISK AND DECISION MAKING PROCESS Katarína RIPLOVÁ University of Žilina, Faculty of Management Science and Informatics, Slovak Republic e-mail: Katarina.Riplova@fri.uniza.sk Abstract The paper deals with problem risk and decsion making process, risk management, risk in decision making process and risk control. Current business environment is defined by quite big amount instability and possibilities of unforeseenable changes. Base upon environment characteristics above, the structure of decision making is decision making under condition of safety, risk and uncertainty. Risk management represents the process of risk identification, estimation of its potential impact and finding the most effective methods of control or reacting to those risks. Keywords: risk, decision making process, manager, decision risk management 1 INTRODUCTION The risk of a right decision is an inseparable part of manager decisions, primarily of strategic management planning of vital projects and business plans. There are always two aspects on a business, positive and negative. The positive risk feature relates to the hope for success, negative one manifests itself in worse results than expacted, or even in a loss. The increase of business success probability in demanding market environment requires active and systematic work with risk. This is the principal role of risk management. The decision making...
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...Explain comparative advantage, absolute advantage and explain what that has to do with today’s economy. A country has an absolute advantage in the production of a good relative to another country if it can produce the good at lower cost or with higher productivity. Absolute advantage compares industry productivities across countries. In the case of Zambia, for instance, the country has an absolute advantage over many countries in the production of copper. This occurs because of the existence of reserves of copper ore or bauxite. We can see that in terms of the production of goods, there are obvious gains from specialization and trade, if Zambia produces copper and exports it to those countries that specialize in the production of other goods or services. It is easy to see that if countries have an absolute advantage there are advantages to trade. However, what happens if one country has an absolute advantage over its trading partners in the production of a number of goods. Specialization and trade can still result in there being welfare gains made from trade. A country has a comparative advantage in the production of a good or service that it produces at a lower opportunity cost than its trading partners. The opportunity cost of a good is the quantity of other goods sacrificed to make another unit of that good. Some countries have an absolute advantage in the production of many goods relative to their trading partners. Some have an absolute disadvantage....
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...transportation costs, the conclusions of our trade model must be modified. This is because transportation costs result in: a. | Lower trade volume, higher import prices, smaller gains from trade | b. | Lower trade volume, lower import prices, smaller gains from trade | c. | Higher trade volume, higher import prices, smaller gains from trade | d. | Higher trade volume, lower import prices, greater gains from trade | 5. Which trade theory suggests that a newly produced good, once exported, could ultimately end up being imported as the technology is transferred to lower- cost nations? a. | Factor endowment theory | b. | Product life cycle theory | c. | Overlapping demand theory | d. | Comparative advantage theory | 6. Which of the following suggests that by widening the market's size, international trade can permit longer production...
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...Comparative Advantage and Absolute Advantage ______________________________________________________________________________________________ absolute advantage: A country, individual, or firm has an absolute advantage in producing a good if production of the good absorbs fewer resources (or less time, in the case of an individual) than are required in other countries or by other individuals or firms. comparative advantage: A comparative advantage in producing or selling a good is possessed by an individual or country if they experience the lowest opportunity cost in producing the good. ______________________________________________________________________________________________ Comparative Advantage The division of labor facilitates production of a given good, but how do individuals or groups determine which specific goods or services to produce? The maximum potential gains from trade tend to be realized if you specialize in that activity which you can do at the lowest cost relative to other people’s costs. In 1817, David Ricardo, an influential early economist, focused on international trade when he generalized this idea into an economic law. The law of comparative advantage: Mutually beneficial exchange is possible whenever relative production costs differ prior to trade. This law applies to all exchanges, whether between individuals or nations. Opportunity cost is the key to comparative advantage: Individuals and nations gain by producing goods...
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...Basically blab la is a business resolution adopted by the firms to determine if it is financial sound to produce the item or to purchase the item Letters of credit are also used on financial trade to provide the beneficiary with the promise of pay or as a contract for a sale. Cornelio reayna Professor Patrick coolt Principles of Management AMM 103 October 16, 2005 Absolute Advantage and Comparative Advantage According to the classic model of international trade introduced by David Ricardo (19th-century English economist) to explain the pattern and the gains from trade in terms of comparative advantage, it assumes a perfect competition and a single factor of production, labor, with constant requirements of labor per unit of output that differ across countries. The basis for trade in the Ricardian model is the differences in technology between countries. As a result, there are two different ways to describe technology differences: the first method, called absolute advantage, is the way most people understand technology differences; and the second method, called comparative advantage,...
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...Absolute Advantage and Comparative Advantage According to the classic model of international trade introduced by David Ricardo (19th-century English economist) to explain the pattern and the gains from trade in terms of comparative advantage, it assumes a perfect competition and a single factor of production, labor, with constant requirements of labor per unit of output that differ across countries. The basis for trade in the Ricardian model is the differences in technology between countries. As a result, there are two different ways to describe technology differences: the first method, called absolute advantage, is the way most people understand technology differences; and the second method, called comparative advantage, is a much more difficult concept. Absolute advantage is the simplest measure of economic performance. It is the ability to produce a good at a lower cost, in terms of real resources than another country. Absolute Advantage is neither necessary nor sufficient for a country to export a good. In other words, a country has an absolute advantage economically over another, in a particular good, when it can produce that good more cheaply or it can produce more of the good than another country can, with the same amount of resources. In fact, absolute advantage appears when multiple products are being considering. For example, if the country “A” has an economic advantage against the country “B” at producing the product “X”, and the country “A” has an economic...
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...UNIVERSITY OF TECHNOLOGY, JAMAICA SCHOOL OF BUSINESS ADMINSTRATION ECO 1001: INTRODUCTION TO MICROECONOMICS TUTORIAL #1 1. Which of the following is the best definition of economics? a) The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided. b) The study of how consumers spend their income. c) The study of how business firms decide what inputs to hire and what outputs to produce. d) The study of how the Jamaican government allocates tax dollars. 2. Competitive behaviour a) occurs as a reaction to scarcity. b) occurs only in a market system. c) occurs only when the government allocates goods and services. d) always generates waste. 3. Which of the following can be classified as microeconomics or macroeconomics? Why? a) Research into why the growth rate of total production (in Barbados) increased during the1990s. b) A theory of how consumers decide what to buy. c) An analysis of IBM’s share of the personal computer market in Jamaica. d) Research on why interest rates were unusually high in the late 1970s and early 1980s. 4. Discuss whether each statement is an example of positive economics or normative economics or if it contains elements of both positive and normative economics: a) An increase in interest rates will lower the growth rate of the Jamaican economy. b) The 1990s was...
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...Resources abound in africa but how to manage them well to take advantage of absolute and comparatives cost ADVANTAGES is the problem. Introduction Africa is endowed with a rich diversity of environmental resources. Some of these are geographical, terrestrial, aquatic and country-specific resources while others transcend national boundaries of two or more countries within the region or continent. Since World War II, Africans have embarked on the massive utilisation of their environmental resources for improving their quality of life and that of their global business partners (Frobel et al. 1988; French 2000). In spite of the abundance of these resources, local communities, predominantly smallholder farmers and pastoralists, whose production systems are based on Traditional Environmental Knowledge Systems (TEKS), are now unable to meet their basic needs, sustain environmental productivity and even have an equitable share of the global wealth (ADALCO 1990). The predominance of international trade over local needs fostered, among other things, specialisation in spatial production and exchange of goods and services on a global scale, what evolved today as theories of Absolute and Comparative Advantage. Consequently, it is evident that in some geographical areas, natural resources are still sustainably utilised, while in others there is evidence of environmental degradation or inefficient utiliatization (Stebbing 1935; Timberlake 1985; Blaikie 1989; Juma and Ford 1992; Rugumamu...
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... ( international trade occurs for the same reasons as interregional trade ( gains from technology and gains from trade III. Trade in an Individual Product ( trade in cloth (U.S./India) — Figure 2.1 ( supply and demand ( the effects on India and the U.S. IV. Trade Based on Absolute Advantage A. Absolute Advantage ( PASSPORT: Football Games, Rats, and Economic Theory ( PASSPORT: Mercantilism ( Table 2.1 B. The Gains from Specialization and Trade with Absolute Advantage ( gains from trade — Table 2.2 ( the labor theory of value V. Trade Based on Comparative Advantage A. Comparative Advantage ( Table 2.3 ( David Ricardo ( Babe Ruth B. The Gains from Specialization and Trade with Comparative Advantage ( PASSPORT: Principal Exports of Selected Countries — Table 2.4 ( Change in world output — Table 2.5 VI. Trade Based on Opportunity Costs A. Opportunity Costs ( PASSPORT: Labor Costs as a Source of Comparative Advantage — Table 2.6 B. The Gains from Specialization and Trade with Opportunity Costs ( Table 2.7 ( Autarky VII. The Production Possibilities Frontier and Constant Costs A. The Production Possibilities Frontier — Table 2.8 B. Production and Consumption Without Specialization and Trade — Figure...
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...What are the differences between absolute advantage and comparative advantage? Answer Study Island: A country has comparative advantage if it can produce a good for less cost than any other nation. Absolute advantage and comparative advantage are two basic concepts to international trade. Under absolute advantage, one country can produce more output per unit of productive input than another. With comparative advantage, if one country has an absolute (dis)advantage in every type of output, the other might benefit from specializing in and exporting those products, if any exist. A country has an absolute advantage economically over another, in a particular good, when it can produce that good at a lower cost. Using the same input of resources a country with an absolute advantage will have greater output. Assuming this one good is the only item in the market, beneficial trade is impossible. An absolute advantage is one where trade is not mutually beneficial, as opposed to a comparative advantage where trade is mutually beneficial. A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country. The theory of comparative advantage explains why it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good. What matters is not the absolute cost of production but the opportunity cost, which measures how much production...
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...CONCEPTS OF MICROECONOMICS Weighing Opportunity Costs In our first week of Microeconomics we are looking closely at a specific scenario. We will use what we read and what we learned the first week, about the basics of Microeconomics. We will look closely at opportunity costs and at comparative advantages. The scenario this week is as follows. Two people, Michelle and James live alone in an isolated region. They each have the same resources available and they grow potatoes and raise chickens. If Michelle decides to use all her resources growing potatoes, she can grow about 200 pounds a year. If she devotes all her resources to raising chickens, she can raise 50 a year. If James devotes all his resources to growing potatoes, he can grow 80 pounds a year. If he devotes all his resources to raising chickens, he can raise 40 a year. Now we will answer a few specific questions about the scenario. What is Michelle’s opportunity of producing potatoes? The opportunity cost of producing potatoes, if all resources are used, is not raising any chickens. If Michelle used all resources to grow the potatoes, no resources would be left to raise chickens. What is Michelle’s opportunity cost of raising chickens? If Michelle decides to use all resources to raise chickens, her opportunity cost would be growing potatoes. If she uses all resources to raise chickens, nothing would be left over to grow potatoes. What is James’ opportunity cost of producing potatoes?...
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...Opportunity Costs, Absolute Advantage and Comparative Advantage Abstract This work defines and illustrates examples of opportunity cost. It also defines and compares comparative and absolute advantage. Then, the work extends the narrative to compare these terms in today’s society. Opportunity Costs, Absolute Advantage and Comparative Advantage Example 1: | Potatoes | Chickens | Michelle | 200 | 50 | James | 80 | 40 | * What is Michelle’s opportunity cost of producing potatoes? (1 / 200) x 50 = 0.25 Chickens 200 Potatoes = 50 Chickens 1 Potato = 1/200 x 50=0.25 Chickens Opportunity Costs= 0.25 Chickens * What is Michelle’s opportunity cost of producing chickens? (1 / 50) x 200 = 4 Potatoes 50 Chickens = 200 Potatoes 1 Chicken = 1/50 x 200= 4 Potatoes Opportunity Costs= 4 Potatoes * What is James’ opportunity cost of producing potatoes? (1 / 80) x 40 = 0.5 Chicken 80 Potatoes = 40 Chickens 1 Potato = 1/80 x 40= 0.5 Chickens Opportunity Costs= .5 Chickens * What is James’ opportunity cost of producing chickens? (1 / 40) x 80 = 2 Potatoes 40 Chickens = 80 Potatoes 1 Chicken = 1/40 x 80 = 2 Potatoes Opportunity Costs= 2 Potatoes * Which person has an absolute advantage in which activities? * Michelle has an absolute advantage as she produces both more chickens and potatoes. * Which person has a comparative? * James has a comparative advantage to produce chickens because his opportunity costs are lower than Michelle...
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...argue that, over the long term, protectionism often ends up hurting the people it is intended to protect and often promotes free trade as a superior alternative to protectionism. Tariffs, non-tariff barriers and other forms of protection serve as a tax on domestic consumers. Moreover, they are very often a regressive form of taxation, hurting the poorest consumers far more than the better off. Protectionism is frequently criticized by mainstream economists as harming the people it is meant to help. Most mainstream economist instead support free trade. Economic theory, under the principle of comparative advantage, shows that the gains from free trade outweigh any losses as free trade creates more jobs than it destroys because it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Comparative Advantage Comparative advantage refers to a country's ability to produce a particular good with a lower opportunity cost than another country. Protectionists believe that there...
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...based upon opportunity cost the absolute advantage in producing potatoes and chickens. Opportunity cost of producing potatoes Michelle 200 Potatoes= 50 Chickens~ 1 Potato= 1/200*50=0.25 Chickens Michelle’s opportunity cost of producing potatoes is 0.25(1/4) chickens. James 80 Potatoes= 40 Chickens~1 Potato=1/80*40=0.5 Chickens James’ opportunity cost of producing potatoes is 0.5 (1/2) chickens. Opportunity cost of producing chickens Michelle 50 Chickens=200 Potatoes~1 Chicken= 1/50*200= 4 Potatoes Michelle’s opportunity cost of producing Chickens is 4 Potatoes. James 40 Chickens= 80 Potatoes~1 Chicken=1/40*80= 2 Potatoes James’ opportunity cost of producing Chickens is 2 Potatoes. Absolute Advantage In this scenario, Michelle has the absolute advantage due to the fact that Michelle can produce more potatoes and chickens than James can produce. Comparative Advantage for Potatoes Michelle, 200 Potatoes =50 Chickens~200/200P=50/200C~1P=0.25C (1/4C) James, 80 Potatoes=40 Chickens~80/80P=40/80C~1P=0.5C (1/2C) In the instance of Potatoes, since Michelle has a lower opportunity cost to produce potatoes she has the comparative advantage. Comparative Advantage for Chickens Michelle, 50 Chickens=200 Potatoes~50/50C=200/50P~1C=4 Potatoes James, 40 Chickens= 80 Potatoes~40/40C=80/40P~1C=2 Potatoes In the instance of Chickens, since James has a lower opportunity cost to produce chickens he has the comparative advantage. Specializing in Potatoes ...
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