Question

Part a:

According to Adam Smith's law of absolute advantages and David Ricardo's law of comparative advantages:

A. if one country has an absolute or comparative advantage over another country in producing one or more goods, then if the country with the advantage specializes in making this good it will raise total world output.

B. if a country has an absolute advantage in producing a good over another country, then it increases total world output if this country specializes in making this good. If this same country has a comparative advantage over another country, then both countries should continue to produce their products. Neither country should specialize.

C. countries with an absolute or comparative advantage can produce goods cheaper than countries who do not have this advantage. The countries with the disadvantage are justified to put tariffs and quotas on the imported goods from the advantaged country.

D. Rich countries always get richer in a comparative way, but not in an absolute way. In an absolute way all countries progress economically due to government regulations, foreign aid and financial help from world organizations such as the IMF and the World Bank.

Part B:

The United States can produce one cell phone in 2 hours and one barrel of ethanol fuel in 5 hours. Canada, on the other hand, produces one cell phone in 4 hours and one barrel of ethanol fuel in 6 hours. According to the Law of Comparative Advantages, Canada would benefit by specializing in:

  

A. both products.

   

B. cell phones.

   

C. ethanol fuel

   

D. Neither product.

Answer 1

a) "A"

As per the law of absolute advantage and comparative advantage if one nation has a comparative advantage and they specialize in the production of that good then while trading the total world output will increase. the answer is "A".

b) The opportunity cost of cell phone production in US is 2.5 barrels of Ethanol fuel and the opportunity cost of producing the same in Canada is only 1.5 barrels of fuel. As Canada has a lower opportunity cost in cell phone they should specialise in that. the answer is "B", cell Phone.