Macroeconomics

Q1.

When 2 countries concentrate on specific things and trade these things then everyone

able to get merchandise within which the opposite specializes at a lower price than it'd to

provide these merchandise itself. I trust the statement only if there's associate absolute and

comparative advantage within the specialization. If associate absolute advantage exists, it'd

indicate that one country will manufacture one thing with victimization fewer resources and

higher economies of scale. If a comparative advantage exists, it'd indicate that a rustic will

manufacture an honest at a lower cost than another country.

Trades permits for folks to focus on merchandise that they stand out in, and get

merchandise during which they are doing not. as an example, AN lineman will acquire services

from a medical practitioner UN agency has gone to high school and has been through the

coaching that qualifies him/her to try to to this job, as a result of the medical practitioner

focuses on teeth the lineman will feel comfort in knowing everything are going to be done

properly and vis-a-versa, trade and specialization area unit intimately connected. Once trade

is applied to countries it works very similar to the medical practitioner and lineman (Ragan,

C.T.S 2014).

“More of some merchandise area unit created domestically than residents wish to

consume, whereas residents would love to consume larger quantities of alternative

merchandise than area unit created domestically.” (Ragan, C.T.S. 2014).

When countries are self-sufficient they consume only what they produce therefore

diminishing trade gains. If trading country were to specialize in products that they are most
suited to produce due to comparative advantage (produce certain goods at lower opportunity

cost) and trade for other goods in which the other country has comparative advantage they

would then both gain mutually and increase consumption (Ragan, C.T.S. 2014).

Q 2(a).

Terms of trade (TOT) represent the ratio between a country's export prices and its import

prices. This is related to the quantity of imported goods that can be obtained per unit goods

exported. The terms of trade ration is calculated with the following formula:

𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠

TOT = 𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑖𝑚𝑝𝑜𝑟𝑡 𝑝𝑟𝑖𝑐𝑒𝑠 x 100

𝑃𝑥
or, TOT = 𝑃𝑚 x 100

Example

Terms of trade = (150 index of export prices/125 index of import prices) X 100

= 150/125 * 100

= 120

Therefore, the Terms of Trade (TOT) indicates that the country can purchase 20 more imports

with the amount of exports. However, on the flip side if the TOT decreases it would indicate

that the country would be have a shortfall and need more exports to purchase the same

quantity of imports.

Developing countries tough will increase within their terms of trade throughout the artifact

worth boom in the early 2000s. They may get additional trade goods from different countries

once merchandising an explicit amount of commodities, like oil and copper.

In the past 20 years, however, an increase in economic process has reduced the value of

factory-made product. Industrial countries' advantage over developing countries is turning

into smaller.

Q 2(b).

Comparative Advantage refers to opportunity costs of producing an item. “Comparative

advantage is a condition of a producer where it is better suited for production of one good

than another good. Good A can be produced more efficiently than good B, for example. This

comparison is done in terms of opportunity costs of each good, not in terms of pure

production costs. Opportunity cost is how much you can produce of the good B with the same

amount of labor, capital, and other resources that it takes to produce one of good A. This is

the tradeoff- how much of good B must be sacrificed in order to get one more of good A”

(Econport, n.d.)

For Example: Consider two countries: Country A and Country B. Their economies consist

entirely of guns and butter. The following table shows the individual production possibilities

of country A and country B

Guns per day Butter per day

Country A 50 100
Country B 25 5

For Country A, for every 1 gun that they make they have to give up 2 lbs. of butter. And for

every pound of butter that Country A produces they must give up 1/2 of a gun. For Country

B, in order to make 1 gun they must give up the production of 1/5 lbs. of butter. And for every

pound of butter they produce, they must give up on producing 5 guns. From this we can see
that Country A has a comparative advantage in the production of butter and Country B has a

comparative advantage in producing guns.

 References

Investopedia. Terms of Trade Retrieved from

https://www.investopedia.com/terms/t/terms-of-trade.asp

Econport. (n.d.).Comparative Advantage. Retrieved from

http://www.econport.org/content/handbook/productionpossibilities/Compa

rative-Advantage.html

Ragan, C.T.S. (2014) Macroeconomics. Fourteenth Canadian Edition. Don Mills,

Ontario : Pearson Toronto