Using the concepts of absolute and comparative advantage answer the questions: 5

Question

Using the concepts of absolute and comparative advantage answer the questions: 500 words

1) Why does the U.S. trade goods with other countries that they can produce themselves? Wouldn’t the U.S. be better off producing the goods themselves?

2) In your opinion, has the U.S. outsourced too much? Explain why you believe that the U.S. has or has not outsourced too much keeping in mind the reasons why corporations outsource, and the benefits derived from this strategy.

******Please review the following resources when forming your opinion; you are free to do as much research as you want however your opinion should be based on data and not assumptions!

For example, just because your cousin lost his job because it was sent overseas doesn’t necessarily mean that there was an overall negative economic impact!

- Economics of Outsourcing Policy http://www.plu.edu/~econ331/home.html The Case for Outsourcing Jobs http://money.cnn.com/2012/09/14/news/economy/outsourcing-jobs/index.html

- Outsourcing for Dummies (and the Willfully Ignorant) http://www.forbes.com/sites/danikenson/2012/07/11/outsourcing-for-dummies-including-the-willfully-ignorant/#39516eaa6821 US Manufacturers

- Have Three Million Available Jobs To Fill http://www.infowars.com/us-manufacturers-have-three-million-available-jobs-to-fill/

- U.S. Trade: Exports and Imports Decline Sharply in January 2009 http://www.calculatedriskblog.com/2009/03/us-trade-exports-and-imports-decline.html

***Please take a look at how import and exports mirror each other****

Explanation / Answer

Q1. A country is said to have absolute advantage in production of a good or services if it is able to produce more quantity of such good or service in comparison of another country using same quantity of resources and technology.

A country is said to have comparative advantage in production of a good or service if it is able to produce such good at lower opportunity cost (quantity of other goods or services sacrificed to produce the said good or service) in comparison to other country.

A country can enjoy absolute advantage in production of many goods or services but trade is not based on absolute advantage.

Basis of trade is comparative advantage.

Countries generally export goods that they can produce at lower opportunity cost in comparison to rest of the world and imports goods that they can produce at higher opportunity cost in comparison to rest-of the world.

Trade on basis of comparative advantage help the countries in avoiding wastage of resources and expands the world production and consumption.

Thus, countries can produce many goods themselves but still they import such goods from United States because United States can produce such goods at lower opportunity cost and thus importing goods become cheaper for the stated countries than indulging in domestic production of such goods. This way countries are able to save resources and enlarge production and consumption.

Since, no country has comparative advantage in production of all goods and services, United States would not be better-off producing the goods themselves. This is because it can get many goods at lower opportunity cost (from other countries) than producing them domestically.

This way United States can also save resources and enlarge production and consumption.

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