# Absolute Advantage: A country is called to have absolute advantage in production of one good if it can produce that good at a lower per unit cost than the other country.
Now according to Ricardo's Theory of Comparative Advantage If a country has lower opportunity cost of producing a good than the other country than it has comparative advantage in production of that good.
In our example Sweden has lower opportunity cost of producing shoes hence,Sweden has comparative advantage in production of shoes.
Where as Italy has lower opportunity cost in production of calculator hence, Italy has comparative advantage in production of calculator.
c.) PPF shows all the different combination of two goods that a country can produce using all his resources efficiently.
d)
# Autarky price is the price ratio which exists within the country when country is not involved in trade.
For optimality we need CIC to be tangent to PPF and Price ratio must pass through that point.i.e,
Slope of PPF = Slope of CIC = Pc/Ps
where,
Pc = price of calculator
Ps = price of shoes
# CIC = Community Indifference curve
We know the slope of PPF for each country and at optimal price ratios will be equal to them hence we know the price ratio in each country under autarky.
Slope of PPF in Sweden = S/C = 240/120 = 2 ; hence, price ratio in Sweden under autarky = 2.
Similarly,
Slope of PPF in Italy = S/C = 80/160 = 1/2 ; hence, price ratio in Sweden under autarky = 1/2.
e.)
To get the answer of (d) part note that it was given in the question that consumers always spend 1/2th of their income on each good. And also they will be both consuming and producing at the same point under autarky. I leave it on you to find that point.
Hint: You can always use a well behaved cobb douglas to represent a utility function and you can always assume there is only one consumer in the country.
Leturer: Assoc. Prof Bigshan Karbay respectively. [Here you have to use the CORREL command in Excel)l...
respectively. [Here you have to use the CORREL command in Excel]. DO NOT ATTACH YOUR DATA TECHNICAL ANALYSIS For technical analysis, you need to follow Step 4. Step 4. In order to conjecture the circumstances in these two countries under autarky (when there is no trade), consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Italy and Sweden) are the only two countries in the world, at least for purposes of trade. There are...
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