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Absolute Advantage Theory, International Business Video Lecture | International Business - B Com
FAQs on Absolute Advantage Theory, International Business Video Lecture - International Business - B Com
| 1. What is the absolute advantage theory in international business? |  |
Ans. The absolute advantage theory in international business suggests that a country has an absolute advantage in producing a particular good or service if it can produce more output with the same amount of input resources compared to another country. In other words, it focuses on the efficiency of production and specialization based on the availability of resources and technological capabilities.
| 2. How does the absolute advantage theory impact international trade? | |
Ans. The absolute advantage theory impacts international trade by promoting specialization and trade between countries. According to the theory, countries should focus on producing goods or services in which they have an absolute advantage and then trade with other countries for goods or services in which they have a relative disadvantage. This allows countries to maximize their production efficiency and overall welfare through international exchange.
| 3. What are the limitations of the absolute advantage theory? | |
Ans. The absolute advantage theory has some limitations. Firstly, it assumes that resources are mobile between industries within a country, which may not always be the case. Secondly, it does not consider factors such as transportation costs, tariffs, and non-tariff barriers, which can significantly impact international trade. Lastly, it overlooks the importance of economies of scale and technological advancements in determining a country's competitiveness.
| 4. How does the absolute advantage theory differ from the comparative advantage theory? | |
Ans. The absolute advantage theory focuses on the overall efficiency of production, whereas the comparative advantage theory emphasizes the opportunity cost of production. While the absolute advantage theory suggests that a country should specialize in producing goods or services in which it is more efficient, the comparative advantage theory suggests that a country should specialize in producing goods or services with a lower opportunity cost compared to other countries. Comparative advantage considers the relative efficiency rather than the absolute efficiency of production.
| 5. Can a country have an absolute advantage in all goods or services? | |
Ans. No, a country cannot have an absolute advantage in producing all goods or services. The concept of absolute advantage implies that a country is more efficient in producing a particular good or service compared to another country. However, each country has different resource endowments, technological capabilities, and labor skills, which may vary across industries. Therefore, it is unlikely for a country to have an absolute advantage in all goods or services, and specialization based on comparative advantage is more realistic and beneficial for international trade.
Text Transcript from Video
hi there here's a quick video looking at
absolute advantage and making a
comparison with comparative advantage
so absolutely Vantage happens where the
country can use the product using just
fewer resources than another nation it's
just more efficient in absolute terms
and if you can do that it's we say that
has an absolute advantage in comparison
comparative advantage is better to do
with the relative opportunity cost if
you decide to specialize in something so
it could be the case that a country has
an absolute disadvantage in both
products but actually has a relative
advantage in what opportunity cost of
horses the is the sacrifice you make
when you specialize in a particular
product now in this video we're just
going to focus on an absolute advantage
just using a simple numerical example
and here it is let's take two workers
the sake of argument we'll call these
workers Hillary and Donald and they both
have 10 hours of time available let's
say per day
we're told that with 10 hours of time
available Hillary could lay 80 books or
bake 20 cakes Donald could lay 40 bricks
or bake 50 cakes so if they divide their
time equally between the two activities
Hillary lays 40 bricks bake 10 cakes
Donald 40 and divided by 2 e lays 20
bricks and can make 25 tapes so total we
could have 60 books laid and 35 cakes
baked if both workers Hillary and Donald
allocated five hours to each it should
be hopefully clear to you that in this
situation Hillary's just as an absolute
advantage in books she's a better but
Claire the gnarled and Donald god bless
em has an absolute advantage in baking
cakes is just a better Baker than
Hillary's to make sense for them to
specialize based on absolute advantage
and if they do that then the total
output of both can increase so if they
were to split their ten hours equally
five each without 50 bits laid and 35
cakes baked but if they decide to
specialize
then Hillary would lay bricks
and a sea of them Donald we specialize
in the great bake-off 50 cakes so we get
a gain of 20 bricks and 15 paise so
absolute advantage can lead to gains in
output we're assuming here constant
returns from each person specializing in
the tasks to which they have an absolute
advantage as I say absolute avantage is
different from comparative advantage
this is the slightly more simple version
of the trade theory that you've
presumably come across
so check out our YouTube video on
comparative advantage for more complex
example
absolute advantage and making a
comparison with comparative advantage
so absolutely Vantage happens where the
country can use the product using just
fewer resources than another nation it's
just more efficient in absolute terms
and if you can do that it's we say that
has an absolute advantage in comparison
comparative advantage is better to do
with the relative opportunity cost if
you decide to specialize in something so
it could be the case that a country has
an absolute disadvantage in both
products but actually has a relative
advantage in what opportunity cost of
horses the is the sacrifice you make
when you specialize in a particular
product now in this video we're just
going to focus on an absolute advantage
just using a simple numerical example
and here it is let's take two workers
the sake of argument we'll call these
workers Hillary and Donald and they both
have 10 hours of time available let's
say per day
we're told that with 10 hours of time
available Hillary could lay 80 books or
bake 20 cakes Donald could lay 40 bricks
or bake 50 cakes so if they divide their
time equally between the two activities
Hillary lays 40 bricks bake 10 cakes
Donald 40 and divided by 2 e lays 20
bricks and can make 25 tapes so total we
could have 60 books laid and 35 cakes
baked if both workers Hillary and Donald
allocated five hours to each it should
be hopefully clear to you that in this
situation Hillary's just as an absolute
advantage in books she's a better but
Claire the gnarled and Donald god bless
em has an absolute advantage in baking
cakes is just a better Baker than
Hillary's to make sense for them to
specialize based on absolute advantage
and if they do that then the total
output of both can increase so if they
were to split their ten hours equally
five each without 50 bits laid and 35
cakes baked but if they decide to
specialize
then Hillary would lay bricks
and a sea of them Donald we specialize
in the great bake-off 50 cakes so we get
a gain of 20 bricks and 15 paise so
absolute advantage can lead to gains in
output we're assuming here constant
returns from each person specializing in
the tasks to which they have an absolute
advantage as I say absolute avantage is
different from comparative advantage
this is the slightly more simple version
of the trade theory that you've
presumably come across
so check out our YouTube video on
comparative advantage for more complex
example
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