Question

Absolute and Comparative Advantage

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?

Answer 1

1.Ans: United States has an absolute advantage in producing lumber.

2,Ans: United States has an absolute advantage in producing automobiles.

Explanation:

A country is said to have an absolute advantage in the production of a good when the country can produce more units of the good with the available or existing resources compared to other producers.

3.Ans: Canada has a comparative advantage, if any, in producing lumber.

4.Ans: United States has a comparative advantage, if any, in producing automobiles

Explanation:

For United States;

The opportunity cost of producing 1 unit of Lumber = 8 / 8 = 1 unit of Automobile

The opportunity cost of producing 1 unit of Automobile = 8 / 8 = 1 unit of Lumber

For Canada;

The opportunity cost of producing 1 unit of Lumber = 2 / 4 = 0.5 unit of Automobile

The opportunity cost of producing 1 unit of Automobile = 4 / 2 = 2 unit of Lumber

A country has comparative advantage in the production of a good in which it has lower opportunity cost as compared to other country.

5.Ans: Yes , the U.S. should trade with Canada. Lumber should be imported and Automobile should be exported.

6.Ans: Yes , Canada should trade with the U.S. , Automobile should be imported and Lumber should be exported.