In: Economics
Macroeconomics – Week #1 Assignment
Use the table below to answer the questions concerning absolute and comparative advantages.
Lumber |
Automobiles |
|
United States |
8 |
8 |
Canada |
4 |
2 |
1. Which country has an absolute advantage in producing lumber?
2. Which country has an absolute advantage in producing automobiles?
3. Which country has a comparative advantage, if any, in producing lumber?
4. Which country has a comparative advantage, if any, in producing automobiles?
5. Should the U.S. trade with Canada? If so, what should be imported and what should be exported?
6. Should Canada trade with the U.S.? If so, what should be imported and what should be exported?
A country that has absolute advantage is able to produce more goods given its resources. Comparative Advantage on the other hand is when a country can produce a good at a lower opportunity cost vs. the other country.
1. As America produces 8 and Canada produces 4, America has an absolute advantage in producing lumber.
2. US produces 8, while Canada produces 2, thus US has an absolute advantage in producing automobiles.
3. Whichever country which has a lower opportunity cost has a comparative advantage for that product. Opportunity cost for lumber in US is 8 automobiles / 8 lumber = 1
Opportunity cost for Lumber in Canada is 2 automobiles / 4 lumber = 0.5, Thus Canada has a comparative advantage in terms of Lumber as opportunity cost is lower.
4. In the same way opportunity cost for Automobiles in US is 8 lumber / 8 automobiles = 1
For Automobiles in Canada is 4 lumber / 2 automobiles = 2
Thus America has a lower opportunity cost for Automobiles and thus has a comparative advantage.
5. Whichever country has a lower opportunity cost should trade with that product, Thus America should import Lumber from Canada and export Automobiles.
6. Whereas Canada should import Automobiles and export Lumber.