Explain the following 1. theory of comparative advantage. 2. the difference betw

Question

Explain the following

1. theory of comparative advantage.

2. the difference between constant opportunity cost and increasing opportunity cost. Illustrate the production possibilities frontier for each case.  

3. the Heckscher-Ohlin and Stolper-Samuelson theories with respect to international trade.

4. Why will a country’s comparative advantage tend to change over time? Please make reference to factor markets and factor prices.

5. the primary product export growth strategy. What are the benefits? What are the potential problems or limitations?

6. What is the potential advantage of selling a differentiated manufactured or processed good over a homogeneous primary product?

7. the idea behind the import substitution strategy. What policies were typically adopted as part of this strategy?

8. the idea behind the export promotion strategy.

Explanation / Answer

1. The theory of comparative advantage was coined initially in the simple Ricardian model where there were two economies, two commodities and one factor of production. When the two economies can produce each of the commodities at a lower opportunity cost compared to the others then each economy will have a comparative advantage in the respective commodity.

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