Question

Let's assume that Germany produces one piece of furniture in 20 hours and Ethiopia produces the same product in 5 hours. Also, Germany produces a piece of clothing in 8 hours and Ethiopia produces the same product in 4 hours. Then:

A. Germany has a comparative advantage in producing clothing and should produce and sell clothing in exchange for furniture made by Ethiopia.

B. Ethiopia has a comparative advantage in making clothing and should specialize in and sell clothing to Germany in exchange for furniture.

C. Ethiopia has an absolute advantage in producing both products and should produce both products without engaging in international trade.

D. Germany has an absolute advantage in making furniture and clothing and should specialize in and sell furniture and clothing to Ethiopia in exchange for money.

Part b:

A system of income inequality:

  

A. provides those who are more productive the ability to reap higher rewards.

  

B. provides incentives for individuals and businesses to be productive and efficient.

  

C. generally leads to a higher average standard of living than a system of income equality.

  

D. All of the above.

Answer 1

a) the opportunity cost of producing a clothing in Germany is 20/8 = 2.5 furniture and the opportunity cost of producing clothing in Ethiopia is 5/4 = 1.25 furniture.

As the Ethiopians can produce cloth by giving up less furniture they have a comparative advantage in clothing and shpuld specialise in that. the answer is "B".

b) "B"

The system of inequality provides incentives for the individuals and business to be more productive and efficient.