Question

Suppose that the United States and Canada can each produce two products: lumber and beef.

Create a table like the one below, showing labor requirements per unit of output for each country. (Hint: Choose numbers for each country that are easily divisible by one another.)

Labor Requirements per Unit of Output United States Canada Lumber Beef What does absolute advantage mean?

How do you calculate absolute advantage? In what output(s) does the U.S. have an absolute advantage?

Explain using the data from your table. In what output(s) does Canada have an absolute advantage?

Explain using the data from your table. What does comparative advantage mean? How do you calculate comparative advantage? In what output(s) does the U.S. have a comparative advantage? Explain using the data from your table. In what output(s) does Canada have a comparative advantage? Explain using the data from your table. What product should each country export? Why?

Answer 1

Answer: The following table shows the total amount of labour required to produce one unit of lumber and one unit of beef for each country:

	1 unit of Lumber	1 unit of Beef
United States	4 units of labor	2 units of labor
Canada	5 units of labor	1 units of labor

The following table shows the opportunity cost for each country to produce 1 unit of each commodity:

	Lumber	Beef
United States	2 unit of beef	1/2 units of lumber
Canada	5 unit of beef	1/5 units of lumber

What does absolute advantage mean?

Absolute Advantage refers to the ability of a nation or a producer to produce a commodity at a lower input price than other producer or nation. The theory of Absolute Advantage was first used by Adam Smith on his book "The Wealth of Nations", published in 1776.

How do you calculate absolute advantage? In what output(s) does the U.S. have an absolute advantage?

When a nation can produe a unit of output at a lower input cost relative to other nation; it has absolute advantage in that commodity (measured in terms of amount of input used up to produce a commodity relative to amount of input other nation has to use to produce the same commodity unit).

In this example, U.S has an absolute advantage in production of lumber since it requires less labor input than Canada.

Explain using the data from your table. In what output(s) does Canada have an absolute advantage?

Canada has an absolute advantage in production of beef since it requires less labor input than U.S.

Explain using the data from your table. What does comparative advantage mean? How do you calculate comparative advantage? In what output(s) does the U.S. have a comparative advantage?

A country is said to have a comparative advantage in that commodity which it can produce at a lower opportunity cost compared to other country.

When a country has to give up lower amounts of other outputs to produce a given output compared to other country (measured in terms of units of inputs required to produce one unit of current commodity compared to the amount of other commodity the same input could've produced), it has a comparative advantage in that commodity.

U.S. has a comparative advantage in production of Lumber, since it requires less opportunity cost measured in terms of beef than Canada.

Explain using the data from your table. In what output(s) does Canada have a comparative advantage?

Canada has a comparative advantage in production of Beef, since it requires less opportunity cost measured in terms of lumber than U.S

Explain using the data from your table. What product should each country export? Why?

U.S should export lumber while Canada should export beef. In other words, each country should export that commodity where they have a comparative advantage in.

Comparative advantage theory states that a country should specialize and export that commodity which it can produce at a lower opportunity cost than other country.