Question

Suppose that the United States and Saudi Arabia can each produce two products, oil and personal computers. The labor requirements per unit of output are provided in the table below: Hint: Create a table that shows the amount of each good that could be produced with given the labor requirement. Assume 100 workers. Each questions point value is given in ( ).

Labor Requirements Per Unit of Output
	United States	Saudi Arabia
Oil	20	10
Automobile	50	5

1.   Calculate opportunity costs to produce each good: (4)
   1. Opportunity cost to produce Oil in the United States is:

2. Opportunity cost to produce an Automobile in the United States is:

3. Opportunity cost to produce Oil in Saudi Arabia is:

4. Opportunity cost to produce an Automobile in Saudi Arabia is

2. What does absolute advantage mean? (1)

3. Which country has an absolute advantage in producing oil? (1)

4. Explain your answer to #3 using the data from the table. (1)

5. What does comparative advantage mean? (1)

6. In what output(s) does the U.S. have a comparative advantage? (1)

7. Explain your answer to #6 using the data from the table. (1)

8. In what output(s) does Saudi Arabia have a comparative advantage? (1)

9. Explain your answer to #8 using the data from the table. (1)

10. What product should each country export? (1)

Answer 1

	US	Saudi Arabia
Total output: Oil	100/20 = 5	100/10 =10
Automobile	100/50 = 2	100/5 = 20

1. Opportunity cost to produce Oil in the United States = Automobile given up/Oil produced = 2/5 = 0.4 unit of automobile

2. Opportunity cost to produce an Automobile in the United States = Oil given up/Automobile produced = 5/2 = 2.5 unit of oil

3. Opportunity cost to produce Oil in Saudi Arabia = Automobile given up/Oil produced = 20/10 = 2 unit of automobile

4. Opportunity cost to produce an Automobile in Saudi Arabia = Oil given up/Automobile produced = 10/20 = 0.5 unit of oil

5. Absolute advantage means that the country can produce more amount of a good than another country.

6. Saudi Arabia has an absolute advantage in producing oil.

7. It has an absolute advantage because it can produce more oil than the US as we know that 10 > 5.

8. Comparative advantage means that the opportunity cost of producing a good is smaller in the nation than the other country.

9. U.S. have a comparative advantage in producing oil.

10. This is because opportunity cost of producing oil is lower in the US than in Saudi Arabia.

11. Saudi Arabia have a comparative advantage in producing automobiles.

12. This is because opportunity cost of producing automobiles is lower in the Saudi Arabia than in the US.

13. US should export oil and Saudi Arabia should export automobiles based on its comparative advantage.