Review Handout | Absolute Advantage and Comparative Advantage | Cases XXXXXXXXXXpages) *Holding other things constant and considering the usual assumptions for the 2C-2G-1F model and production per...

Holding other things constant and considering the usual assumptions for the 2C-2G-1F model and production per unit of labor for both Case 1 and Case 2 below, determine which country has the absolute advantage and comparative advantage in which good.


Review Handout | Absolute Advantage and Comparative Advantage | Cases 1-3 (3 pages) *Holding other things constant and considering the usual assumptions for the 2C-2G-1F model and production per unit of labor for both Case 1 and Case 2 below, determine which country has the absolute advantage and comparative advantage in which good. Example Case 1 Country Good X Good Y Opp. Cost of X in term of Good Y? Opp. Cost of Y in terms of Good X? Country A 60 60 /60 =1 60/80 = 3/4 80 80 /60 =4/3 80/80 = 1 4/3 (=1.33) ¾ = 0.75 Country B 35 70 2 To determine who has a comparative advantage in which good, we will need to calculate opportunity costs of good X and good Y in each country first. In the case of Country A above, the opp. cost of X (in terms of Y) is the number of units of Good Y Country A should give up in order to produce one more unit of Good X. To find out this, we can simply divide the number of Good X and Good Y per unit of labor in each cell by 60, respectively, so that we can see how many units of Good Y Country A should give up to produce one more unit of Good X in Country A. As shown above, it will be 1.33. By the same token, in the case of Country A, the opp. cost of Y (in terms of X) is the number of units of Good X Country A should give up in order to produce one more unit of Good Y. To find out this, we can simply divide the number of Good Y and Good X per unit of labor in each cell by 80, respectively, so that we can see how many units of Good X Country A should give up to produce one more unit of Good Y in Country A. As shown above, it will be 0.75. 1. Which country has an absolute advantage in producing X and Y, respectively? Hint) Per unit of labor, which country is producing Good X (Good Y) more in absolute terms? 2. Country A has a comparative advantage in producing: 3. Country B has a comparative advantage in producing: Case 2 Country Barrels of Wine Bales of Wool Opp. Cost of Wine? Opp. Cost of Wool? Portugal 20 20 The U.K. 40 80 1. Which country has an absolute advantage in producing wine and wool, respectively? 2. Portugal has a comparative advantage in producing: 3. The U.K. has a comparative advantage in producing: Case 3. Now assume that country “American” can produce either 20 songs or 40 boxes of roses per week. Assume that country “Eagle” can produce 10 songs or 50 boxes of roses per week. Consider the usual assumptions holding other things constant. Country Songs Roses Opp. Cost of Songs Opp. Cost of Whiskey American 20 40 Eagle 10 50 a. Which has a comparative advantage in the production of songs? b. Which has a comparative advantage in the production of roses? c. If each produces songs for one week and then roses for one week, show the total production of both goods. Country Songs Roses American Eagle Total d. Now, assume each country specializes for two weeks. Indicate the total production of both goods. Show that trade between the two countries after this two-week period can allow both countries to consume both more roses and songs. Country Songs Roses American Eagle Total