what is the meaning of “invisible hand” theory give an example to illustrate your explanation

Give an example?Theory of Absolute Advantage: Given by Adam Smith in 1776, the theory of absolute advantage stated that a country should specialize in those products, which it can produc

MID-TERM EXAMINATION

Class : D1KQ-KD

Subject : International Economic

Code subject : ECO 103 Number of Credits: 03 Date : 12/09/2021

Duration :

Code test :

Nhóm 1:

- Nguyễn Thị Ngọc Trâm

- Châu Hải Yến

- Hoàng Sỹ Quân

- Lê Việt Hải

- Lò Hoàng Ân

QUESTION 1: THEORIES

1 What is the meaning of “Invisible hand” Theory? Give an example to illustrate your explanation?

The invisible hand is a metaphor, an economic idea introduced by the economist Adam Smith in 1776 In his great work Inquiry into the Nature and Causes of the Wealth of Nations) and others, Smith has stated that, in a free market economy, each individual pursues an interest and tendency for his own personal gain, and his own actions these individuals tend to further promote and strengthen the interests of the community as a whole through an "invisible hand" He argued that each individual who wants to maximize his or her own profit maximizes the benefit of the community, which is like adding up all the interests of each individual

Example:

Cars, Driving, and the Automotive Industry

Consider the need for cars:

- The amount of people in the market for a new car fluctuates depending on the overall health of the economy

- As more people purchase cars, car manufacturers have to produce more cars in order to meet the demand

- They then have to hire more workers to meet that demand If workers are in short supply due to a healthy economy, the car manufacturer must then offer the workers better pay or benefits in order to entice them to come to work

Layer on the introduction of ride-sharing services

- When a user opts to take a ride using a ride sharing app, the Invisible Hand asserts itself in the form of surge pricing

- Prices on ride sharing apps remain at low levels throughout the course of the day because the demand for rides from users is at near equilibrium to the supply of drivers

- When the demand in a certain area becomes high, say after a concert or at the airport, prices rise, which encourages more drivers to head to that area to balance the supply

2 What is the meaning of mercantilism?

Mercantilism was a practical application of economic theory, widely used in Europe from the sixteenth to the eighteenth centuries, to promote government coordination of the national economy with the aim of increasing that state power

by undermining the power of rival states It is the economic equivalent of political authoritarianism It includes national economic policies aimed at accumulating monetary reserves through a positive balance of trade, especially in finished goods

3 What is the meaning of Comparative Advantage? Give an example?

Competitive advantage is what a country, business, or individual does that provide

a better value to consumers than its competitors There are three strategies companies use to gain a competitive advantage First, they could be the low-cost provider Second, they could offer a better product or service Third, they could focus on one type of customer

Example: You are in demand to provide both plumbing and babysitting services But it’s not necessarily because you do them better (absolute advantage) It's because you charge less

4 What is the meaning of Absolute Avantage? Give an example?

Theory of Absolute Advantage:

Given by Adam Smith in 1776, the theory of absolute advantage stated that a country should specialize in those products, which it can produce efficiently This theory assumes that there is only one factor of production that is labor

Adam Smith stated that under mercantilism, it was impossible

for nations to become rich simultaneously He also stated that wealth of the countries does not depend upon the gold reserves, but upon the goods and services available to their citizens Adam Smith wrote in The Wealth of Nations, ”If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage”

He stated that trade would be beneficial for both the countries if country A exports the goods, which it can produce with lower cost than country B and import the goods, which country B can produce with lower cost than it

Example: An example can be used to prove this theory Suppose there are two countries A and B, which produce tea and coffee with equal amount of resources that is 200 laborers Country A uses 10 laborers to produce 1 ton of tea and 20 laborers to produce 1 ton of coffee Country B uses 25 units of laborers to produce tea and 5 units of laborers to produce 1 ton of coffee country A has absolute advantage in producing tea as it can produce 1 ton of tea by using less laborers as compared to country B On the other hand, country B has absolute advantage in

producing coffee as it can produce 1 ton of coffee by employing less laborers in comparison to country A

Now, if there is no trade between these countries and resources (in this case there are total 200 laborers) are being used equally to produce tea and coffee, country A would produce 10 tons of tea and 5 tons of coffee and country B would produce 4 tons of tea and 20 tons of coffee Thus, total production without trade is 39 tons (14 tons of tea and 25 tons of coffee)

If both the countries trade with each other and specialize in

goods in which they have absolute advantage, the total production would be higher Country A would produce 20 tons of tea with 200 units of laborers; whereas, country B would produce 40 tons of coffee with 200 units of laborers Thus, total production would be 60 units (20 tons of tea and 40 tons of coffee) Without specialization, total production of countries was 39 tons, which becomes

60 tons after specialization Therefore, the theory of absolute advantages shows that trade would be beneficial for both the countries

QUESTION 2: ABSOLUTE ADVANTAGE

QUESTION 3: COMPARATIVE ADVANTAGE