ECO121 Macroeconomics

Class: MKT1602
Term: Summer2021
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STUDENT INFORMATION
Name: CAO BÁ TRỌNG Roll HS150057
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Individual Assignment 01

Question 1. (5 points)

1. a. What is defined as absolute advantage

Answer:
Absolute advantage is the ability to produce a good using fewer inputs
than another producer. Two countries can gain from trade when each
specializes in the good it produces at lowest cost.
Absolute advantage measures the cost of a good in terms of the inputs
required to produce it.
b. What is defined as comparative advantage?
Answer:
Comparative advantage is the ability to produce a good at a lower
opportunity cost than another producer. Gains from trade arise from
comparative advantage (differences in opportunity costs). When each
country specializes in the good(s) in which it has a comparative
advantage, total production in all countries is higher, the world’s
“economic pie” is bigger, and all countries can gain from trade.
c. Case 1: Output approach
Two commodities and two countries
Given the resources, Singapore and Malaysia can produce the following
products – television sets and cars (see Table 01)
Countries TV sets Cars (units)
Singapore 100 50
Malaysia 60 40
Table 01
+ Which country has the absolute advantage in the production of both
TV sets and Cars over the other?
Answer:
Singapore can produce more both TV sets and Cars than Malaysia.
Because with the same resources, Singapore can produce 100 TV sets
and 50 cars and Malaysia can only produce 60 TV sets and 40 cars. 🡪
Singapore has an absolute advantage in both goods.
+ Which country has the comparative advantage either in the production
of TV sets or in the production of Cars over the other?
Answer:
TV sets
Singapore: Instead of producing 1 TV set, they can produce 0.5 car - -
--- The opportunity cost of 1 TV set in Singapore is 0.5 car.
- Malaysia: Malaysia must give up 0.67 car to produce 1 TV set - The
opportunity cost of 1 TV set in Malaysia is 0.67 car.
- Singapore has the comparative advantage in the production of TV.
Cars
- The opportunity cost of 1 car in Singapore is 2 TV sets
- The opportunity cost of 1 car in Malaysia is 1.5 TV sets
- Malaysia has the comparative advantage in the production of cars.
d. Case 2: Input approach
Two commodities and two countries
Give the resources, America and England can produce one unit for both
Steel and Coal in terms of number of working hours shown as follows:
Countries One unit of Steel One unit of
required Coal required
America 80 man-hours 90 man-hours
England 120 man-hours 100 man-
hours
Table 02
+ Which country should specialize in the production of Steel?
Answer:
In America
Producing one unit of steel requires 80 man-hours, which instead could
produce 0.89 units of coal.
🡪 America should specialize in the production of Steel

+ Which country should specialize in the production of Coal?

Answer:
In England
Producing one unit of coal requires 100 man-hours, which instead could
produce 0.83 unit of steel
-> England should specialize in the production of Coal

e. Case 3: Input approach

Two countries but multiple commodities
The following Table 03 shows the numbers of man – days taken to
produce an equivalent amount of six commodities in each of the two
countries – Switzerland and Sweden.
Countries Coal Cotton Wool Iron Wheat Maize
Switzerland 120 60 70 100 140 80
Sweden 100 25 35 90 90 20
Table 03
+ Assuming that there are no other costs of production. Which two
commodities is Sweden most likely to import from Switzerland?

Answer:
In Switzerland
1 Coal = 0.5 Cotton = 0.583 Wool = 0.833 Iron = 1.1667 Wheat = 0.75
Maize.
In Sweden
1 Coal = 0.25 Cotton = 0.35 Wool = 0.9 Iron = 0.9 Wheat = 0.2 Maize.
- As we can see, Sweden should import Coal because the opportunity of
Coal is the highest opportunity cost in this country (=1).
- In Sweden, the opportunity cost of Iron and Wheat is the same, so that
they should produce one of them.
Besides that, in Switzerland, the opportunity cost of Iron is lower than
Wheat’s, so Switzerland has the comparative advantage in the product
Iron than Wheat. Thus, Sweden should import Iron from
Switzerland. 🡪 2 commodities Sweden most likely to import from
Switzerland are Coal and Iron.
Question 2. (5 points)

+ What are the benefits/gains from international trade?

● Boosting economic growth: Trade tends to raise GDP by as much as

two percent for every percentage point increase in the ratio of trade-to-
GDP.
● Increasing overall consumer welfare: A 2005 study by Langenfeld
and Nieberding estimated that consumer benefits from imports
accounted for nearly six percent of median household income in 2002.
● Lowering prices for consumers: Trade lowers domestic prices;
improves resource allocation through specialization; lowers profit
margins of domestic producers and increases operating efficiency of
domestic firms through increased competition.
● Expanding product variety available to consumers: Trade increases
product variety particularly among trading countries with similar
resource endowments and technologies. 
● Benefiting lower-income households: Big box retailers are among the
largest import companies and confer substantial benefits on a wide
range of the population.
● Increasing overall employment: trade liberalization can increase
overall employment in the long run and during recessions, which is not
surprising given that trade enhances economic growth and the damage
increasing trade barriers did in the Great Depression.

+ What are the disadvantages of international trade?

● Intellectual Property Theft
The wider a product is distributed, the more likely that it may be
illegally copied by a competitor. This can be in the form of proprietary
information or market branding.
● Cultural Differences
They are the unwritten rules of commerce in the country that are hard to
uncover and can be even more difficult to solve.
● Evil Effects of Dumping
Sometimes, certain countries use international trade to dump their goods
on other countries with a view to cheapen the value of the latter goods.
● Customer service
Differences in languages, time zones, geographical distances, etc. are
some of the major limitations of international trade.
● Exhaustion of Essential Materials
International trade may result in the exhaustion of essential materials
and minerals of a country. Most of the minerals were exported to other
countries. If they had been preserved they would have brought better
returns to the country.
● Dependence on other Nation
Though it ensures a higher standard of living for a nation, it makes the
countries dependent on foreign markets not for raw materials but also
for selling the finished products. This dependence should be reduced or
eradicated.