Absolute advantage, subsidies and tariffs
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1.) What is meant by "absolute advantage" in international trade? Is it ever sustainable? Explain.
2.) What is the real purpose of subsidies? Why are they restrictive to world trade? Give an example.
3.) What are your thoughts on using restrictive tariffs for the protection of infant industries in the global marketplace?
4.) General Motors, Ford and Chrysler all needed governmental help in keeping their business going in this recession. There are, however, dozens of automobile manufacturers in this country whose plants are doing quite well: Mercedes, Nissan, Toyota, Kia and Hyundai. What are they doing different to make a profit without government help?
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Solution Summary
The solution discusses absolute advantage, subsidies and tariffs. It also dissects why other automobile companies need government help while others do not.
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1.) Absolute advantage means that capability of a country to produce a product or service cheaper than other countries producing the same product or service.
Absolute advantage can only be sustainable if smaller numbers of inputs are employed. It is said that "entities with absolute advantages can produce something using a smaller number of inputs than another party producing the same product. As such, absolute advantage can reduce costs and boost profits".
2.) Subsidies, usually coming from the government, are intended to ease the selling price of the product or service. The purpose is that government defrays part of the price so that it will not be charged to the ultimate consumers.
A typical example was the case of the oil industry in the Philippines. In the lates1980s to early 1990s, the government's Oil Price Stabilization Fund (OPSF) was created to manage the volatility of the price of fuel products in that country. In other words, if there is an increase in the price of oil per barrel in the world market, say by 10%, the government would subsidize the cost of the increase so that local oil dealers will buy the oil at the old price. In so doing, oil consumers will not feel the price hike of the product in the world market.
On the other hand, if there is a reduction in the price of oil per barrel in the world market, the government's OPSF gain profits because it will not adjust to the current price but will maintain the old world market ...
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