Question

In: Economics

Discussion True or False and Why? I would like you to evaluate whether the following statements...

Discussion

True or False and Why?

I would like you to evaluate whether the following statements are true or false. Also, please provide your reasoning to support your answers.


Absolute vs. Comparative Advantage

Suppose that U.S. has an absolute advantage in the computer production compared to Germany, while Germany has an absolute advantage in the auto production compared to U.S. This implies that U.S. has a comparative advantage in the computer production and Germany has a comparative advantage in the auto production.

Production Possibility Frontier (PPF) vs. Consumption Possibility Frontier (CPF)

The Production possibility frontier is always the same as the consumption possibility frontier. (Hint: (Compared the case of no trade versus free trade)

Instructions

Please make your initial post by midweek, and respond to at least one other student's post by the end of the week.

Solutions

Expert Solution

1. Absolute vs. Comparative Advantage: FALSE

reason- Comparative advantage is not the same as absolute advantage.

A country having absolute advantage in the production of a good may not have comparative advantage in the production of that good.

Comparative advantage depends on the comparative opportunity cost of production. If a country has lower opportunity cost of producing a good than the other country, than it is said to have a comparative advantage in that good.

so US may or may not have comparative advantage in computers and Germany may or many not comparative advantage in auto production.

2. Production Possibility Frontier (PPF) vs. Consumption Possibility Frontier (CPF): FALSE

reason- Only when there is no trade, PPF and CPF are same. CPF shows the budget constraint where participants can consume. PPF shows the production possibility or various combinations in which the two goods can be produced.

Thus, PPF and CPF are same only when there is no trade. With trade, a CPF may lie beyond PPF.

Rahul Sunny answered 7 months ago
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