Reasons for Trade IB Economics 3.1a

Comparative Advantage Absolute Advantage Definitions: Absolute advantage The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service. refers to a country’s ability to produce a certain good more efficiently than another country. Comparative Advantage: A person has a comparative advantage at producing something if he can produce it at lower cost than anyone else. refers to a country’s ability to produce a particular good with a lower opportunity cost than another country.

Comparative Advantage vs Absolute Advantage The lawyer and the secretary example: Because of comparative advantage, countries are best off specializing and trading Trade will tend to equalize factor prices.

The iPhone Economy from the NYT.

General Background Info. on Trade Trade volume Primary materials vs. value added goods FDI Export of partial components

Growth of International Trade 1950- today Value change Change in types of goods traded

Uneven Direction of Trade 1. 2. 3. 4. 5. 6.

Multinational Corporations or Transnational Corporations Define Overview Reasons for growth of MNC A. B. C. D. E. F.

Consequences of growth of MNC’s + +/- - Example: Hoover and Grundig