Business in the International Economy

Topics: Economics, International trade, Comparative advantage Pages: 6 (1720 words) Published: April 18, 2010
ECO8060: Business in the International Economy

Assignment 1

Name: Tabassum Ansari
Student Id: 0000599937

Part A:

1. Demand sensitivity depends on all of the following except Ans. The sensitivity of a Firm’s output to changes in its price.

2. Which of the following is true if the total variable cost curve is rising Ans. Marginal cost is increasing.

3. In exhibit 1 below, when the price is $5, the firm:
Ans. should produce output equal to 7

4. The most recent phase of globalization is charactized by which of the following? Ans. Enormous growth of cross-border trade and investment.

5. Many firms have successfully lowered trade and investment barriers by Ans. Petitioning the World Trade Organization.

6. Which of the following most supports Country A and Country B becoming an economic bloc? Ans. Geographic proximity to each other.

7. All of the following are typical characteristics of emerging markets except Ans. Low inward foreign direct investment.

8. If last year one dollar equalled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely not occur? Ans. European firms lower their prices on goods made with U.S. parts.

9. When firm managers research the external business environment of a potential market they most likely examine all of the following except Ans. Human resources.

10. All of the following are advantages that firms often experience through exporting except. Ans. Amplified country and corporate risk.
Part B:

In what way was Ricardo’s Law of Comparative Advantage superior to Smith’s theory of absolute advantage? How do gains from trade arise with comparative advantage? How can a nation that is less efficient than another nation in the production of all commodities export anything to second nation?

Trade between two countries has been going on since early days and economists have given logical explanation for international trade and investment. They have written theories why nations promote trade and investment with other nations.

One of the theories was proposed by David Ricardo The Comparative Advantage Principle which states the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced. Comparative advantage theory is an international trade theory. It asserts that individuals or nations trade because they have superior productivity in particular industries, and that they should produce and export goods for which they possess a comparative advantage and import others in which other nations possess a comparative advantage. Two men dwell alone in an isolated island. To survive they must take on a few basic economic activities like water carrying, fishing, cooking and shelter construction and maintenance. The first man is young, strong, and educated and is faster, better, more productive at everything. He has an absolute advantage in all activities. The second man is old, weak, and uneducated. He has an absolute disadvantage in all economic activities. In some activities the difference between the two is great; in others it is small. To work in isolation they both have to take interest so that an exchange or trade can benefit both of them.  They should divide their work according to comparative, not absolute advantage: the young man must spend more time on the tasks in which he is much better and the old man must concentrate on the tasks in which he is only a little worse. Such an arrangement will increase total production and/or reduce total labour. It will make both of them richer. Smith’s Absolute Advantage Theory states that a country benefits by producing only those products in which it has absolute advantage, or can produce using fewer resources than another...

References: N Gregory Mankiw, 2008 Principles in Macroeconomics, 5th Edition, Cengage Learning, USA.
Cavusgil, S. Tamer, Knight, G and Riesenberger, JR 2008, International Business: Strategy, Management and the New Realties, 1st edition, Prentice Hall, New Jersey. Retrieved May 3, 2009.
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