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:

Labor Requirements Per Unit of Output
	United States	Saudi Arabia
Oil	10	8
Personal Computers	30	4

Calculate the labor and opportunity costs for each good, and then compute each country’s absolute and comparative advantage. Use the results to determine what good each country should export and explain your reasoning.

1. What does absolute advantage mean? How do you calculate absolute advantage?
2. Which country has an absolute advantage in producing oil? Explain using the data from the table.
3. Which country has an absolute advantage in producing personal computers? Explain using the data from the table.
4. What does comparative advantage mean? How do you calculate comparative advantage?
5. In what output(s) does the U.S. have a comparative advantage? Explain using the data from the table.
6. In what output(s) does Saudi Arabia have a comparative advantage? Explain using the data from the table.
7. What product should each country export? Why

Answer 1

1) A country have an absolute advantage if it is capable of producing more unit of a good .

2) In Producing oil, Unites States own the absolute advantage as they can produce 10 and Saudi Arabia can produce 8.

3) In Producing computers, Unites States own the absolute advantage as they can produce 30 and Saudi Arabia can produce 4.

4) Country have comparative advantage if they can produce goods at lower opportunity cost.

Opportunity cost of U.S. of producing oil is 3 computer per unit of oil.

Opportunity cost of U.S. of producing computer is 0.33 oil per unit of computer.

Opportunity cost of Saudi Arabia of producing oil is 0.5 computer per unit of oil.

Opportunity cost of Saudi Arabia of producing computer is 2 oil per unit of computer.

5) U.S. have comparative advantage in producing computer as its opportunity cost is lower than Saudi Arabia.

6) Saudi Arabia have comparative advantage in producing oil as its opportunity cost is lower than U.S.

7) U.S. should export computers and Saudi Arabia should export oil.