Assignment No.

3 – Discussion Questions

Answer the following questions based on our previous discussions:

1. Summarize the reasons for international factor movements and discuss their major
effects on countries/nations in general.

International factor movements can sometimes substitute for trade, so it is not surprising
that international migration of labor is similar in its causes and effects to international
trade based on differences in resources. Labor moves from countries where it is
abundant to countries where it is scarce. This movement raises total world output, but it
also generates strong income distribution effects, so that some groups are hurt.
International movements of factors of production, or factor movements. Factor
movements include labor migration, the transfer of capital via international borrowing
and lending, and the subtle international linkages involved in the formation of
multinational corporations. The major effects on it are A push factor could be political
unrest, a lack of job opportunities, or overcrowding. Pull factors occur in a potential
destination and make it an attractive place to migrate to. A pull factor could be better job
opportunities or having relatives or friends who have already moved to this location.

2. Explain the difference between Adam Smith's theory of absolute advantage and
David Ricardo's theory of comparative advantage.

Adam Smith’s Absolute advantage is when one country produces better quality goods at
lower cost than another. It refers to the uncontested superiority of a country or business
to produce a particular good better. For instance, It is easier to extract oil in Saudi
Arabia than in any other country. The abundance of oil in Saudi Arabia makes it easier
as if it’s only drilling oil whereas for other countries it involves exploration and drilling
cost.

While David Ricardo’s Theory of Comparative advantage is when one country is able to
produce goods at a lesser opportunity cost than the other. It signifies the ability to
manufacture goods or services at a relatively lower opportunity cost. Comparative
advantage is based on the opportunity cost of producing a good. Suppose a Country
can produce a particular good at a lower opportunity cost (by losing an opportunity to
produce other goods) than any other country. In that case, it is said to have a
comparative advantage. For instance, Suppose the US and Japan can produce wheat
or rice but not both. The US could produce 30 units of wheat or ten units of rice, and
Japan could produce 15 units of wheat or 30 units. Thus, the opportunity cost of wheat
is three units of wheat for 1 unit of rice for the US, whereas 0.5 units of wheat for each
unit of rice for Japan. Thus, Japan has a comparative advantage in rice production
since it has a lower opportunity cost.