Question

You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?

Short answer

In conclusion, the claim that poor countries like Malawi cannot benefit from trade due to their lack of absolute advantages is incorrect. By understanding and applying the concepts of comparative advantage and gains from trade, we can see how Malawi and other countries with no absolute advantage can still benefit from international trade. Specializing in producing goods and services where they have comparative advantages and trading them with other countries can contribute to their economic growth and development.

Step-by-step solution

Identifying misconceptions in the argument

First, let's identify the misconceptions in the argument. The statement implies that poor countries, like Malawi, have no advantages to offer in international trade. It also assumes that having no absolute advantage means they cannot benefit from trade. So, our main task is to challenge this notion and provide a counter argument.

Understanding comparative advantage

To respond to this claim, we need to understand the concept of comparative advantage. Unlike absolute advantage, which refers to a country's ability to produce a particular good or service more efficiently than other countries, comparative advantage focuses on the relative ability to produce that good or service. A country has a comparative advantage in producing a good if it can produce it at a lower opportunity cost than other countries.

Applying comparative advantage to Malawi

Now let's apply the concept of comparative advantage to Malawi. Even if Malawi may have no absolute advantages, it can still have comparative advantages in certain goods or services. For example, Malawi might be able to produce agricultural products at a lower opportunity cost compared to high-tech goods. So, even if their soil quality and investment in education are comparatively low, they still can specialize in producing goods or services that are better suited to their resources and abilities.

Gains from trade

Trade is not a zero-sum game; countries can both benefit from trade by specializing in the production of goods and services in which they have comparative advantages. By trading with other countries, Malawi can import goods and services that they cannot efficiently produce domestically and export the goods and services in which they have a comparative advantage. This allows Malawi to optimize the use of their resources, increase their productivity, and raise their overall living standards.

Conclusion

In conclusion, the claim that poor countries like Malawi cannot benefit from trade due to their lack of absolute advantages is incorrect. By understanding and applying the concepts of comparative advantage and gains from trade, we can see how Malawi and other countries with no absolute advantage can still benefit from international trade. Specializing in producing goods and services where they have comparative advantages and trading them with other countries can contribute to their economic growth and development.