Why is comparative advantage a driving force behind trade behind trade between regions and countries?
A vivid explanation to trade between countries or regions is differences in comparative advantage. A trade will always exist even if a country is in a position to produce goods more efficiently than the others. Therefore, a country or region will have a comparative advantage over others if it can produce its goods and services at a relatively lower cost or cheaply. The driving force or determinants of a country’s comparative advantages include its natural resources, factors of production and the availability of technology (Bourdet, Gullstrand, & Olofsdotter, 2007). The factors of production are capital, land, and labor. Additionally, the country will invest all its resources in the most competitive industries at disposal.
Why does specialization lead to welfare improvement? Why engaging in trade is better than trying to be self-sufficient?
Specialization mainly duels in increasing the incentives for other improvements. Therefore, if the social and economic system allows an individual to benefit from his/her productivity, then specialization will increase the incentive to improve better. It will also affect the general welfare of the individual and others involved in innovation. Similarly, due to international trade, countries can specialize in the production of goods in which they have a comparative advantage. In such situation, the world utilizes its resources resulting in more output. Also, when countries specialize and export their goods in which they have comparative advantage and trade for other goods and services, both countries benefit. They become better off by consuming the goods and services beyond their respective production possibility frontier.
Moreover, individuals can gain more from trade than they could if they endeavored to be self-sufficient. When individuals, regions or countries divide the task and engage in trade, they provide others with goods and services, and they also receive the same in return. In the end, each one will gain from trade by getting more of what they want.
How does the production possibility frontier model help us understand the feasible and efficient amounts that can be produced? What does the outward shift in production possibility curve indicate?
The production possibility frontier is used to represent the point at which the goods and services are most efficiently produced in the economy. The best possible way is to allocate resources. If the resources are managed inefficiently, it means that the economy does not produce the quantities indicated by the production possibility frontier. Similarly, the PPF portrays there are limits to production. Therefore, it must decide the combination of goods and services to produce to achieve efficiency in the economy. The outward shift in the PPF indicates that there is growth in the economy.
What are the major markets and economic decision makers (economic agents) the circular flow diagram indicate? What is the importance of the diagram in various markets of the economy or economic interactions (transactions)?
The two major economic agents the circular flow diagram indicates are households and business firms. Both the business firms and the households interact in two distinct ways. First, the household supplies the business firms with economic resources that include labor. In exchange, the business firms provide the households with income. Second, households will use the income from the supply of resources to buy goods and services produced by the firms (Daraban, 2010). The first type of interaction between the households and the business occurs in markets for resources while the second occurs in markets for products.
Bourdet, Y., Gullstrand, J., & Olofsdotter, K. (2007). The European Union and developing countries: Trade, aid and growth in an integrating world. Cheltenham, UK: E. Elgar Pub.
Daraban, B. (2010). Introducing the Circular Flow Diagram to Business Students. Journal of Education for Business, 85(5), 274-279.
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