Economics in a Global Environment Assignment Your answer Points Does either Phil or Francis have an absolute advantage in producing both products Phil can produce either one financial statement or answer 10 phone calls, meanwhile Francis can either produce 3 financial statements or answer 12 phone calls, this means that Francis is more efficient in both activities and has absolute advantage over Phil. Phil does not have an absolute advantage, but he has a comparative advantage
2. Should Phil and Frances specialize or be self-sufficient
Phil and Frances should definitely specialize in order to gain value from mutual exchange. To define what each of them should specialize in, we have to calculate what Phil’s and Frances’s comparative advantage is. By analyzing internal opportunity costs we can define in what these two guys should specialize in order to provide maximum output
3. Clearly show your work and calculations in the column to the right.
To identify who should specialize in a particular activity I have calculated the internal opportunity cost for Phil and Frances. For example, if Phil shifts more resources into higher output of phone calls, the opportunity cost of each extra phone call is of financial statement. For Frances the same decision has an opportunity cost of 1/10 of phone calls. Therefore France has a comparative advantage in financial reports. Were Frances to reallocate resources to financial statements, the opportunity cost of one extra financial statement is 10, meanwhile for Phil the opportunity cost is 4 of the phone calls. Thus Phil has a comparative advantage in phone calls (please refer to the Appendix 1)
4. Define, in your own words, any economic terms used in your explanation (e.g. absolute advantage)
Absolute advantage – ability to produce or do something more efficiently than others.
Comparative advantage – a margin of being better in the production of a good or service, where the opportunity cost of production is lower.
5. Bibliography (Citation of all sources in APA format: every assignment must have at least one citation)
1. Hill, Charles W.L. International Business: competing in the global marketplace. McGraw-Hill. 2005.
2. David A Kendrick. Models for Analyzing Comparative Advantage. Business &. Economics. 1989.
6. Points assigned for following template/file name requirements
Countries benefit if they specialize in the production of a good or service in which they have a comparative advantage i.e. a lower internal opportunity cost.
On the other hand the comparative advantage theory is not consistent with the current economic reality. The evidence shows that comparative advantage is human made rather than natural. Many economists argue that there is no such thing as free trade. Countries use industrial strategies and trade tactics in order to create human made comparative advantage, which will guarantee their success in the global economy1.
Nowadays, comparative advantage is human made. Natural resources are international commodities and therefore each country can easily acquire them in the market without producing them locally. Now days any country can have access to capital and buy the newest technology without being obliged to produce them locally. Thus, strategic development and planning can provide better (compared to natural resources) competitive edge. Therefore, the main trend in the economy is focusing on the development of some strategic industries that later on will be able to contribute directly or indirectly to the expansion of other sectors in the economy. Another trend is the liberalization of the trade, that will result in a full exploitation of factors of production through comparative advantage. On the microeconomic level this trend will influence full utilization of the factors of production such as labor and land.
For mutually beneficial trade to be conducted the two nations have to agree an acceptable rate of exchange of one product for another. Output of all products can increase – representing a gain in economic welfare. Free trade might increase a country’s stock of resources as increased supplies of labor and capital from aboard become available for use within the country, free trade also can increase the efficiency with which a country uses its resources. Gains in both the stock of a country’s resources and the efficient with which resources are utilized will cause a country’s PPF to shift outward. And as a result, a shift of PPF indicates that a country can produce more.
The openness of countries towards free trade and therefore higher economic growth I the tendency that one can observe right now.