Q1: How mercantilism and the absolute advantage theory see international trade differently?
Mercantilism believes everything shall be produced domestically and maximizing exports & minimizing imports is the best route to national prosperity.
Instead, absolute advantage theory believes countries should specialize in what they do best (means making a product cheaper, better and faster) while trading with other countries who are also doing what they’re best at. With specialization and free trade, all countries can end up consuming more products than in the absence of trade.
Q2: What are the similarities and differences between the absolute advantage theory and the comparative advantage theory?
- Both theories believe any economy has limited resources and there will be opportunity cost for making any product. Opportunity cost refers to the loss of potential gain from making one product because of choosing to make another product.
- Both theories believe countries should specialize in production (rather than making everything by itself as suggested by the mercantilism).
- Both theories also support free trade (rather than intentionally maximizing exports and minimizing imports as suggested by the mercantilism).
- According to the absolute advantage theory, countries can only specialize in producing and exporting products that they can make absolutely cheaper, better and faster than other nations. Whereas according to the comparative advantage theory, countries should specialize in producing and exporting products that they have relatively bigger advantages or relatively smaller disadvantages [i.e. a country should choose to make and export products with a lower opportunity cost].
- Developed countries like the US may enjoy absolute advantages over a less developed country such as Haiti, for ALL products. However, a country CANNOT enjoy comparative advantages for ALL products it makes: there will always be some products that a country has bigger advantages or smaller disadvantages in making compared with other nations.
- According to the absolute advantage theory, least developed countries (LDCs) may not be able to export any products (because they may not have absolute advantages in making any products over developed countries). However, according to the comparative advantage theory, even LDCs can export to developed countries— for those products that LDCs suffer relatively smaller disadvantages in making. Meanwhile, developed countries can focus on making products they enjoy relatively bigger absolute advantages over LDCs. As the example demonstrated in class, with specialization based on comparative advantages and free trade, all countries still can end up consuming more products than in the absence of trade.
Q3: What is the contribution of the factor proportion theory?
Although the comparative advantage theory illustrates how nations should specialize in producing and exporting, it failed to explain what shapes a nation’s comparative advantages. Factor proportion theory answered the question: comparative advantage depends on countries’ relative endowment of factors of production. The country which is relatively abundant in labor will have a comparative advantage in the production of relatively labor intensive goods. The nation which is relatively capital abundant will have a comparative advantage in the production of the relatively capital intensive goods. Surely, factor proportion theory supports everything proposed by the comparative advantage theory, especially the argument that with specialization based on comparative advantages and free trade, all countries can end up consuming more products than in the absence of trade.
Q4: Why most apparel consumed in the U.S. are imported from developing countries?
Because generally developing countries enjoy comparative advantages in making clothing whereas US enjoys comparative advantages in making more capital and technology intensive products such as machinery. To be noted, it doesn’t mean US necessarily makes clothing less productive and more expensive than most developing countries. Just economically it is wiser for the US as a capital abundant country to make more capital intensive products so as to maximize the gains from using its limited resources.
Q5: Why top U.S. apparel suppliers in the 1980s (Taiwan, Hong Kong and South Korea) are different from today (China, Vietnam and Bangladesh)? How to explain this phenomenon?
In the 1980s, Taiwan, Hong Kong and South Korea had comparative advantages in making clothing on the basis of their relatively abundant supply of cheap labor back then. However, with the gradual growth of economies and accumulation of capital, these countries/regions start to have more capital relative to labor. As a result, their comparative advantages shift from making labor-intensive clothing to more capital-intensive products such as electronics and machinery. Likewise, once China, Vietnam and Bangladesh become more capital abundant, they may also lose comparative advantages in making labor-intensive clothing to other less-developed economies where cheap labor is more abundant relative to capital.