Questions-Answers about trading

How to calculate terms of trade comparative advantage


How do you calculate terms of trade?

Terms of trade (TOT) represent the ratio between a country’s export prices and its import prices. How many units of exports are required to purchase a single unit of imports? The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100.

What is comparative advantage in trade?

Comparative advantage is an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

How do you calculate absolute advantage and comparative advantage?

  1. Make a table like Table 19.6.
  2. To calculate absolute advantage, look at the larger of the numbers for each product. …
  3. To calculate comparative advantage, find the opportunity cost of producing one barrel of oil in both countries.

What improves terms of trade?

Exchange rate.

A fall in the exchange rate should reduce the terms of trade. This is because a decline in the exchange rate will make exports cheaper. An appreciation in the exchange rate should improve the terms of trade because exports will rise in price and imports become cheaper.

What are the types of terms of trade?

TYPES OF TERMS OF TRADE • Main types of terms of trade, according to jacob viner and meier are follows: 1) Net barter or commodity terms of trade. 2) Gross barter terms of trade. 3) Income terms of trade. 4) Single factorial terms of trade.

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What is an example of a comparative advantage?

Comparative advantage is what you do best while also giving up the least. For example, if you’re a great plumber and a great babysitter, your comparative advantage is plumbing. That’s because you’ll make more money as a plumber.

How do you solve comparative advantage Problems?

A four step solution to solving the comparative advantage and gains from trade problem.

  1. Determine the opportunity costs of production.
  2. Figure out who has the comparative advantage.
  3. Have each country specialize in their comparative advantage.
  4. Figure out an allocation that makes each country better off.

What are the sources of comparative advantage?

1. The quantity and quality of factors of production available for example some countries have an abundant supply of good quality farmland, oil and gas, fossil fuels. Climate and geography have key roles in creating differences in comparative advantage. 2.

What is the relationship between comparative advantage and gains from trade?

The gains from trade are only based on comparative advantage, not on absolute advantage. A country or person can have an absolute advantage in both goods or activities, and yet still gain from trade by specializing in the good or activity in which it has a comparative advantage.

What is the difference between comparative advantage and competitive advantage?

The key distinction is that while comparative advantage seeks to explain patterns and gains from trade, the competitive advantage explains which firms, industries or nations will be winners in a global competition and how they can position for it.7 мая 2015 г.

Which country has comparative advantage?

Thus, the good in which a comparative advantage is held is the good that the country produces most efficiently (for Switzerland, its chocolate).

ChinaSHIRTSBICYCLESNumber of Hours to Produce One Unit12Opportunity Cost (of producing one unit)½ bicycle2 shirts

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What is the difference between comparative advantage and absolute?

Absolute advantage is achieved when one producer is able to produce a competitive product using fewer resources, or the same resources in less time. Comparative advantage considers the opportunity cost when assessing the viability of a product, accounting for alternative products.

What is absolute advantage example?

Consider this example: With its resources, Country A can produce 100 pounds of coffee, or it can make 50 pounds of tea (it cannot make both). With the same resources, Country B can make 90 pounds of coffee or 48 pounds of tea. Country A has an absolute advantage for both products.

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