International Economics: Absolute and Comparative Advantage, NAFTA, Singapore's Economic Strategies, Balance of Payment and Currency Strength

Running head: INTERNATIONAL ECONOMICS
International Economics
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Name of the University
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1INTERNATIONAL ECONOMICS
Table of Contents
Question 1........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................2
Question c....................................................................................................................................3
Question 2........................................................................................................................................3
Question a....................................................................................................................................3
Question b....................................................................................................................................5
Question c....................................................................................................................................6
Question 3........................................................................................................................................7
Question a....................................................................................................................................7
Question b....................................................................................................................................7
Question 4........................................................................................................................................8
Question a....................................................................................................................................8
Question b....................................................................................................................................9
References......................................................................................................................................10

2INTERNATIONAL ECONOMICS
Question 1
Question a
Given the information in table 1, it is observed that US can produce 5 bottles of per unit
of labor hour while UK using the same labor hour can produce 15 bottles of wine. As UK can
produce more bottles of wine using the same labor hour, UK has an absolute advantage in wine
production. Using 1hour of labor US is able to produce 20 yards of cloth. US produces 10 yards
of cloth using the same labor. US thus possesses an absolute advantage in production of cloth.
Following the Adam Smith’s principle of absolute advantage, US should specialize and export
cloth while UK should engage in specialization of wine and export wine. As the nation produces
following their specialization skill, more wine and cloths will be available after trade, which
increases welfare of both the nation.
Question b
The Ricardo’s model of comparative advantage suggest that a nation should specialize
and export goods with a lower opportunity cost relative to others. The primary assumption of
Ricardian model include perfect competition, two nations, two commodities and only one factor
input (Feenstra, 2015).
Following table 2, US enjoys an absolute advantage in both wine and cloth. The proposed
‘Absolute Advantage’ theory of Adam Smith here fails to explain trade direction. Pattern of trade
here needs to be explained using the theory of comparative advantage proposed by David
Ricardo.

3INTERNATIONAL ECONOMICS
Opportunity
Cost Output per labor hour
Nation Wine Cloth
US 40/40 = 1 40/40 = 1
UK 10/20 = 0.5 20/10 = 2
Opportunity cost of wine in UK is lower relative to US. UK therefore has a comparative
advantage in wine. US on the other hand has a lower opportunity cost for cloth. The comparative
advantage of US is thus in production of cloth. As per the Ricardo’s principle of comparative
advantage, UK then should specialize in wine while US should specialize in cloth.
Question c
In Hecksher- Ohlin model, comparative advantage is defined in terms of relative factor
abundance. Countries are separated in terms of their relative factor abundance. Industries are also
segregated in terms of relative factor intensity. A country enjoys a comparative advantage in
producing a commodity when the required factor is abundant in the country and a comparative
disadvantage in goods for which the required factor is available in insufficient quantity.
Question 2
Question a
Before NAFTA
Consumer surplus=1
2 × 80 × ( 14−6 )
¿ 1
2 ×80 × 8