Question

Comparative advantage

5 Consider the following table. Country A Country B MPL of wheat 8 MPL of cloth 10 | 4 a. Which country has an absolute advantage in wheat production? Why? b. Which country has an absolute advantage in cloth production? Why? c. Which country has a comparative advantage in wheat production? (Show why) d. Which country has a comparative advantage in cloth production? (show why) has an absoluto advantage in wheat production? (show

Answer 1

Absolute Advantage for two countries is the efficiency at which one country can produce more output in comparison to another country with fewer inputs and less cost.

Answer a)

Country B has an absolute advantage in wheat production because the MPL for wheat is higher for country B (8) when compared with country A (5).

Answer b)

Country A has an absolute advantage in cloth production because the MPL for cloth is higher for country A (10)when compared with country B (4).

Comparative Advantage is when a country produces with less opportunity cost

opportunity cost =

Asacrificeinoutput Againinoutput

Answer c)

Country A's opportunity cost of 1 MPL of cloth

Country A can produce 10 cloth or 5 bushels of wheat

Therefore; 10 cloth = 5 wheat

So, 1 cloth = 5/10 = 0.5 wheat

Country B's opportunity cost of 1 MPL of cloth

Country B can produce 4 cloth or 8 bushels of wheat

Therefore; 4 cloth = 8 wheat

So, 1 cloth = 8/4 wheat = 2 wheat

As per opportunity cost calculation, Country A has a comparative advantage in wheat production

Answer d)

Country A's opportunity cost of 1 MPL of wheat.

Country A can produce 5 bushels of wheat or 10 cloth

Therefore; 5 wheat = 10 cloth

So, 1 bushel of wheat = 10/5 = 2 cloth

Country B's opportunity cost of 1 MPL of wheat.

Country B can produce 5 bushels of wheat or 10 cloth

Therefore; 8 wheat = 4 cloth

So, 1 bushel of wheat = 4/8 cloth = 0.5 cloth

As per opportunity cost calculation, Country B has a comparative advantage in cloth production