Question

a. For each good, identify which country has an absolute advantage.

b. For each country, calculate the opportunity cost of producing one more unit of cars.

c. For each good, identify which country has a comparative advantage.

d. EXPLAIN how international economic forces will influence the different businesses in each country when trade is allowed, stating clearly what will happen to production and employment in each industry.

e. Calculate what would happen to production levels in each country and for the two countries combined, if each country’s production of its comparative disadvantage good fell by 10 units and the relevant resources were then transferred to increase production of the country’s comparative advantage good.

	Good
Country	Cars	Computers
Country A	10	20
Country B	8	4

Answer 1

Cars

Computers

Country A

10

20

Country B

8

4

1 Country A has absolute advantage in the production of cars and computers as it can produce both goods in larger quantities than country B

2. Comparative advantage is the opportunity cost of producing one good in terms of giving up the other good.

Cars in terms of giving up computers

Computers in terms of giving up cars

Country A

20/10=2

4/8=.5

Country B

10/20=.5

8/4=2

3

Country A has a lower opportunity cost when producing computers (0.5) than Country B (2), so Country A has a comparative advantage in the production of computers.

Country B has a lower opportunity cost when producing cars (0.5) than Country A (2), so Country B has a comparative advantage in the production of cars.

4. International trade increases production of goods and employment as more people are employed in the industries.