Question

1. Why does comparative advantage matter more than absolute advantage for trade?

2. Draw a production possibilities frontier curve. Illustrate the set of points that is feasible, the set of points that is efficient, the set of points that is inefficient, and the set of points that is not feasible. If you prefer not to draw then explain.

3. Explain why seniors often earn lower grades in their last semester before graduation (hint: incentive problem).

Answer 1

Q1.

Comparative advantage matter more than absolute advantage for trade. When considering specialisation in trade, it is assumed that a nation should focus its resources in producing a particular kind of resource sa that opportunity cost of that resource can be reduced. From various theories in literature it is clear that it is more profitable to specialize in the prooduction of a single good rather than producing every good. Absolute advantage is the ability to produce goods using lesser amount of inputs, but this however does not take into account the aspect of opportunity cost i.e. diverting the resources avaiilable in the production of good having lower opportunity cost.