Question

Microeconomics - Absolute Advantage

In Mexico, 5L=1T and 8L =1P. In USA, 2L=1T and 4L=1P. (L: Labor)

Who has the absolute advantage?

Who has the comparative advantage?

Please explain how to get to the answer :)

Answer 1

Answer : 1) Based on given information,

1T is produced by using 5L in Mexico and by using 2L in USA. This means that the USA can produce more T by using 5L. As here USA can produce more in compared to Mexico by using 5L, hence USA has the absolute advantage for T.

Similarly, 1P is produced by using 8L in Mexico and by using 4L in USA. This means that the USA can produce more P by using 8L. As here USA can produce more P in compared to Mexico by using 8L, hence USA has the absolute advantage for P.

Therefore, USA has the absolute advantage.

2) For Mexico :

5L = 1T

=> 1L = 1/5 = 0.2T

Again, 8L = 1P

=> 1L = 1/8 = 0.125P

So, in Mexico 1L can produce either 0.2T or 0.125P. Hence

0.2T = 0.125P

=> 1T = 0.125 / 0.2 = 0.625P

Therefore, in Mexico the opportunity cost of 1T is 0.625P.

Again, 0.125P = 0.2T

=> 1P = 0.2 / 0.125 = 1.6T

Therefore, in Mexico the opportunity cost of 1P is 1.6T.

For USA :

2L = 1T

=> 1L = 1/2 = 0.5T

Again, 4L = 1P

=> 1L = 1/4 = 0.25P

So, in USA 1 labor can produce either 0.5T or 0.25P. Hence

0.5T = 0.25P

=> 1T = 0.25 / 0.5 = 0.5P

Therefore, in USA the opportunity cost of 1T is 0.5P.

Again, 0.25P = 0.5T

=> 1P = 0.5 / 0.25 = 2T

Therefore, in USA the opportunity cost of 1P is 2T.

Now, from above calculation we get that USA has comparative advantage for T because of lower opportunity cost for 1T and Mexico has comparative advantage for P due to lower opportunity cost for 1P.