Question

In the world, two countries and two products, which of the following is true, then explain why.

1-If each of the two countries has an absolute advantage in producing one of the two goods, then each country also has a comparative advantage in producing the same goods.

2-If each of the two countries has a comparative advantage in one of the two goods, then each country should also have an absolute advantage in producing the same goods.

Answer 1

Answer: The 1^st statement is true.

Suppose the table of production is as below:

Countries	Productions (suppose in 1 hour)
	Fruit	Car
Country L	45	65
Country S	20	40

Absolute advantage: This is the comparison between two countries, of which one is producing goods more efficiently than other.

Country L has absolute advantage of producing both fruit and car, since the amounts of production for both these products are higher than the country S.

Comparative advantage: This is the comparison between the two products, of which one has lower opportunity cost than other.

Opportunity costs are given below:

Country L	65/45 = 1.4	45/65 = 0.7
Country S	40/20 = 2	20/40 = 0.5

Now if comparison is done between the two countries, lower opportunity cost should get the comparative advantage.

In case of fruit, country L has the comparative advantage since 1.4 is smaller than 2.

In case of car, country S has the comparative advantage since 0.5 is smaller than 0.7.

Answer: Option 2 doesn’t stand; since although there are two comparative advantages for two different products for two different countries, their absolute advantages are not same. Country S has no absolute advantage; but country L has all absolute advantages.

Again,

Suppose the table of production is slightly changed:

Countries	Productions (suppose in 1 hour)
	Fruit	Car
Country L	45	35
Country S	20	40

Now, Country L has the absolute advantage of producing fruit and Country S has the absolute advantage of producing car.

Opportunity costs are given below:

Country L	35/45 = 0.8	45/35 = 1.3
Country S	40/20 = 2	20/40 = 0.5

In case of fruit, country L has the comparative advantage since 0.8 is smaller than 2.

In case of car, country S has the comparative advantage since 0.5 is smaller than 1.3.

Answer: Option 1 does stand; since the countries having absolute advantages on a specific product also having the comparative advantage on same product.