Question

2. Theory of Comparative Advantage

Now, assume that we have a whole new world, (yet it is still a 2-country/ 2-product world).

South Africa and Nigeria produce copper and gold, respectively. Each country has 100 units of resources to make these goods, and each requires the following number of resources to be used in the production of one ton of product:

	Copper	Gold
South Africa	1	2
Nigeria	2	10

a) Which country has the absolute advantage in the production of copper? How do you know that?

b) Which country has the absolute advantage in the production of gold? How do you know that?

c) David Ricardo would say that South Africa should make its own copper and gold since it has the absolute advantage in the production of both goods. True? False?

d) What would global production be under a “No Trade” scenario? e) What would global production be if the countries specialized in the good for which each has a comparative advantage and they traded with each other?

Answer 1

(a)

• South Africa has the absolute advantage in the production of Copper.
• South Africa, compared to Nigeria uses less number of resources (1 unit as compared to Nigeria's 2 units) and in thus more effective in the production of Copper.

(b)

• South Africa has the absolute advantage in the production of Gold.
• South Africa, compared to Nigeria uses less number of resources (2 units as compared to Nigeria's 10 units) and in thus more effective in the production of Gold.

(c)

• False. According to David Ricardo, a mutually beneficial trade can occur even if one country is less efficient (has an absolute disadvantage with respect to)  the other country in the production of both commodities.
• A mutually beneficial trade can occur when both countries specialise in the production (and export) of the commodity in which they have a comparative advantage.
• As seen, Nigeria has an absolute disadvantage in the production of both Copper and Gold with respect to South Africa.
• However, Nigeria is half as productive in the production of Copper, but five times less productive in Gold with respect to South Africa, Nigeria has a comparative advantage in Copper.
• Similarly, South Africa has a comparative advantage in the production of Gold.
• Thus, for a mutually beneficial trade, Nigeria should focus on the production of Copper and South Africa on the production of Gold.

(d)

With the given information, we can create the table that shows the production of Gold and Commodity for both the countries.

Country	Copper (units)	Gold (units)
South Africa	100	50
Nigeria	50	10

It is calculated as: e.g.,

South Africa for Copper: 100/1 = 100

South Africa for Gold: 100/2 = 50

Nigeria for Copper: 100/2 = 50

Nigeria for Gold: 100/10 = 10

The above table can also be written as:

Commodity	South Africa (units)	Nigeria (units)
Copper	100	50
Gold	50	10

Under a no-trade situation, the total production shall be as follows:

Commodity	South Africa (units)	Nigeria (units)	Total World Production (units)
Copper	100	50	150
Gold	50	10	60