The table above gives the production alternatives of two nations that are producing cloth and food, using equal amounts of resources. People trade for goods and services if they can buy them more cheaply than they could make them themselves. The American statesman Benjamin Franklin (1706–1790) once wrote: “No nation was ever ruined by trade.” Many economists would express their attitudes toward international trade in an even more positive manner. See solution. To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see ). Watch the following video to better understand comparative advantage. The opportunity cost of producing 1 box of peaches for Westland is _____ box(es) of oranges. – more efficient in producing cheese. What we saw in the last video is that Patty had a comparative advantage in plates relative to Charlie because her opportunity cost of producing one plate was lower than Charlie's opportunity cost of producing a plate. You decide to attend the game. So, Germany’s comparative advantage lies in cars. However, thinking about trade just in terms of geography and absolute advantage is incomplete. Suppose it takes 10 hours of labor to mine a ton of copper in Zambia, and 20 hours of labor to harvest a bushel of corn. An example of absolute advantage: Colombia has climatic advantages for producing coffee. have an absolute advantage, but a comparative disadvantage. Answer: Brazil has an absolute advantage in coffee: – Producing a pound of coffee requires only one labor-hour in Brazil, but two in Argentina. To understand the benefits of trade, or why we trade in the first place, we need to understand the concepts of comparative and absolute advantage. 49. Video: Episode 34: Comparative Advantage & Trade. The opportunity cost of producing 1 box of herring for Finland is _____ box(es) of cell phones. So, who has to give up less of other goods to produce it is said to have a comparative advantage in producing that good. Even though the United States has an absolute advantage in producing both refrigerators and shoes, it makes economic sense for it to specialize in the good for which it has a comparative advantage. After all, why should Germany trade with a country that cannot produce anything as efficiently as it can? The United States gives up the least to produce a bushel of corn, so it has a comparative advantage in corn production. Which country should specialize in producing wheat? Finland has a comparative advantage in producing: The opportunity cost of producing 1 box of cell phones for Sweden is _____ box(es) of herring. CFA® Exam, CFA® Exam Level 1, Foreign Exchange. As a worker, if your job is involved with farming, machinery, airplanes, cars, scientific instruments, or many other technology-related industries, the odds are good that a hearty proportion of the sales of your employer—and hence the money that pays your salary—comes from export sales. A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country. Country B can produce 100 bags with the same resources as 4 computers. Trade is based on comparative advantage; absolute advantage is irrelevant. The United States has the absolute advantage in producing both cars and computers. Question 4 1 pts It is possible that one party may: be able to produce everything relatively more efficiently than another party. than another country. True or False: The source of comparative advantage must be natural elements like climate and mineral deposits. This advantage may come because of a country's infrastructure, labor force, technology or innovations, or natural resources. In this case, neither country has an absolute advantage in producing cars because they produce the same output per worker and are, thus, equally productive. In other words, Comparative advantage is what you do best while also giving up the least. The evidence that international trade confers overall benefits on economies is pretty strong. both Mexico and the United States will be better off. Comparative Advantage example, if you’re a great Programmer and a great writer, your comparative advantage is a programming. The United States will export refrigerators and in return import shoes. arrow_back. Q. To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see Table 33.2). Comparative Advantage A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. consume outside its production possibility frontier. How Opportunity Cost Sets the Boundaries of Trade. Suppose The United States Is Currently Producing 40 Tons Of Hamburgers And 12 Tons Of Tacos And Mexico Is Currently Producing 4 Tons Of Hamburgers And 10 Tons Of Tacos. B)can produce more pizzas in a given amount of time than anyone else. What I want to do in this video is make sure we understand the difference between "comparative advantage" and "absolute advantage". Aliceland has a comparative advantage, but not an absolute advantage, in producing food. There is no modern example of a country that has shut itself off from world trade and yet prospered. Difference Between Absolute Advantage vs Comparative Advantage. B) herring A comparative advantage in trade is the advantage that one country has over another in the production of a particular good or service. absolute advantage: when one country can use fewer resources to produce a good compared to another country; when a country is more productive compared to another country comparative advantage: when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production Anything that leads to different levels of productivity between two economies can be a source of comparative advantage. As a result, Zambia gives up the opportunity to produce corn. C) both cell phones and herring. Comparative advantage refers to being able to produce a product at a lower opportunity cost than somebody else. Chile and Zambia have some of the world’s richest copper mines. Even when one country has an absolute advantage in all products, trade can still benefit both sides. (Table: Comparative Advantage 1) Finland has an absolute advantage in producing: A) cell phones only. Although it is 1.2 times better than Japan in producing cars, it is 4 times better at producing trucks. D)charges the lowest price for pizzas. However, it has a comparative advantage in trucks. It takes one U.S. worker to produce 1,000 refrigerators, but it takes four Mexican workers to do so. Comparative advantage says that the producer with the lower … The opportunity cost is the value of the next best alternative foregone. d. a comparative advantage in producing both goods. By looking deeply into each country's bilateral trade, it is not surprising that China has a comparative advantage in labor-intensive goods while the United States has a comparative advantage in the production of high-tech machinery. Which country has an absolute advantage in producing wheat? 32. Many of the national economies that have shown the most rapid growth in the last few decades—for example, Japan, South Korea, China, and India—have done so by dramatically orienting their economies toward international trade. Difference Between Absolute Advantage vs Comparative Advantage. Sweden Finland Herring 100,000 50,000 Cell Phones 10,000 10,000 (Table: Comparative Advantage 1) Sweden has an absolute advantage in producing: A) Cell … In such a case, the theory of absolute advantage would predict that Germany has nothing at all to gain from trading with Algeria. The mercantilist economic theory, which was widely followed between the 16th and the 18th century, came under a lot of criticism with the emergence of economists like John Locke and David Hume. • One point is earned for stating that John has the absolute advantage in producing donuts and for explaining that J ohn can produce more donuts than Erica in one day (200>150). 30 seconds . Free. Which Country Has A Comparative Advantage In Producing Tacos? Absolute and Comparative Advantage. The clothes you wear might be designed in Italy and manufactured in China. For example, extracting oil in Saudi Arabia is pretty much just a matter of “drilling a hole.” Producing oil in other countries can require considerable exploration and costly technologies for drilling and extraction—if indeed they have any oil at all. Chapter 2, Problem 1.2P. Mercantilism advocated a national economic policy designed to maximize the nation’s trade and its gold and money reserves. For example, if Canada can produce 100 pounds of beef using two ranchers, while Argentina needs three ranchers to produce 100 pounds of beef, Canada has an absolute advantage over Argentina in beef production. See Section: Absolute Advantage. In Table 33.1, Saudi Arabia has an absolute advantage in producing oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States.The United States has an absolute advantage in producing corn. b. Karl has both an absolute and a comparative advantage in truck production. absolute and comparative advantage defined and explained with the use of examples The United States gives up the least to produce a bushel of corn, so it has a comparative advantage in corn production. How Opportunity Cost Sets the Boundaries of Trade both cell phones and herring. neither cell phones nor herring. Three best known products in Finland Products Competitive or absolute advantage … If we followed absolute advantage, Finland’s citizens would be pretty upset because they’d be out of work as they would no longer be needed to produce either product. ii. Absolute advantage and comparative advantage are two vital concepts in economics and international trade. Sweden has an absolute advantage in producing: Finland has an absolute advantage in producing, Sweden has a comparative advantage in producing. The game takes five hours and costs you $15 for transportation. Absolute advantage and comparative advantage are two very important terms used in economics. However, this only absolute advantage, or the ability to produce a good or service using fewer resources than other producers. 32. Argentina has a comparative advantage in wine: – Argentina’s opp. If the production possibility frontier is a straight line: As long as people have different _____, everyone has a comparative advantage in something. Implications of Comparative and Absolute Advantage On International Trade. both cell phones and herring O herring only. Absolute advantage can be the result of a country’s natural endowment. An individual has an absolute advantage in producing pizzas if that individual: A)has a lower opportunity cost of producing pizzas than anyone else. 8) Which country has a comparative advantage in producing oranges? In this case, we say that the US has an “absolute advantage” in producing food and that the UK has an absolute advantage in producing cloth. The US has an absolute advantage in producing both cars and trucks. Self-Check Questions. A simplified representation that is used to study a real situation is called a(n): The production possibility frontier illustrates that: if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. Even though the United States has an absolute advantage in producing both refrigerators and shoes, it makes economic sense for it to specialize in the good for which it has a comparative advantage. The United States has some of the richest farmland in the world, making it easier to grow corn and wheat than in many other countries. What happens to the possibilities for trade if one country has an absolute advantage in everything? Figure 1: 1. i. Which nation has the comparative advantage in cloth production? opportunity cost of producing 1 box of herring for Finland is _____ box(es) of cell phones. (2) . In producing cloth? We live in a global marketplace. ... A country has a comparative advantage when it can produce a good at a lower cost in terms of other goods. i. Use the following to answer question 7: Table: Comparative Advantage 1 Sweden and Finland produce only two goods, herring and cell phones, and this table shows the maximum amount that each nation can produce of the two good. The United States will export refrigerators and in return import shoes. The opportunity cost of producing 1 box of herring for Sweden is _____ box(es) of cell phones. The United States has an absolute advantage in producing corn. The evidence that international trade confers overall benefits on economies is pretty strong. Explain how absolute advantage and comparative advantage differ? a. Eastland has a comparative advantage in producing: Westland has a comparative advantage in producing: The circular-flow diagram illustrates how households _____ goods and services and _____ factors of production. e. a combination of cell phones and herring. The opportunity cost of producing 1 box of cell phones for Finland is _____ box(es) of herring. Trade really occurs because of comparative advantage. Economics ECON MICRO (Absolute and Comparative Advantage) You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom: Labor Hours Required to Produce One Unit The United Kingdom The United States Wheat 2 1 Cloth 6 5 a. (Table: Comparative Advantage I) Finland has an absolute advantage In producing: cell phones only. The opportunity cost of producing a car in Japan is 1/2 a computer. Question: If a country has A. an absolute advantage in producing a good, it definitely will not have a comparative advantage in producing that good. (Table: Comparative Advantage I) Finland has an absolute advantage In producing: cell phones only. Is it possible for a country to have both absolute advantage and comparative advantage in producing the same good? What happens if one country has an absolute advantage in both goods? Finland also has important commercial fisheries in Gulf. Comparative advantage says that the producer with the lower opportunity cost has the comparative advantage. A country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good. “A country has an absolute advantage over another in producing a good, if it can produce that good using fewer resources than another country. c. both cell phones and herring. His opportunity cost of going to the opera is: whatever Khalil would have done had he not gone to the opera. (3 points) b. https://cnx.org/contents/vEmOH-_p@4.44:7Nc6vlvb/Absolute-and-Comparative-Advan, https://youtu.be/38hvvAzgXZY?list=PL336C870BEAD3B58B, CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives, https://cnx.org/contents/J_WQZJkO@4.2:bPub2niR@2/Introduction-to-International-, Explain absolute advantage and comparative advantage. Brazil has the absolute advantage in producing beef and the United States has the absolute advantage in autos. The effect of a natural disaster can be shown by _____ the production possibility frontier. 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