Question

Country A can produce 2 televisions per hour of labor or 6 tables per hour. Country B can produce 1 television per hour of labor or 4 tables per hour.

A) Which country has an absolute advantage with televisions? With tables? Explain your answer.

B) Which country has an comparative advantage with televisions? With tables? Explain your answer

C) Which country should produce televisions? Which country should produce tables? Explain your answer.

Answer 1

(A) Since country A can produce more televisions per hour than country B can (2 > 1), country A has absolute advantage in televisions. Since country A can produce more tables per hour than country B can (6 > 4), country A has absolute advantage in tables.

(B) We find Opportunity cost (OC) as follows.

For country A,

OC of television = 6/2 = 3 table

OC of table = 2/6 = 0.33 television

For country B,

OC of television = 4/1 = 4 table

OC of table = 1/4 = 0.25 television

Since country A can produce television at a lower OC than country B can (3 < 4), country A has comparative advantage in television. Since country B can produce tables at a lower OC than country A can (0.25 < 0.33), country B has comparative advantage in table.

(C) As per law of comparative advantage, a country will specialize in producing that good in which it has comparative advantage. So, country A will produce television and country B will produce table.