Question

Country A requires 1 unit of labor to produce 1 unit of good X, and 6 units of labor to produce 1 unit of good Y. While country B requires 6 units of labor to produce 1 unit of good X, and 8 units of labor to produce 1 unit of good Y, which of the following is true: (a) Country A has comparative advantage in good Y (b) Country B has comparative advantage in good Y (c) Country B has absolute advantage in good X (d) Country B has absolute advantage in good Y

Answer 1

Ans: Country B has comparative advantage in good Y

Explanation:

Using 1 unit of labor Country A produces 1 unit of good X or (1/6) unit of good Y.

Country A's opportunity cost of producing 1 unit of good X = 1/6 = 0.17unit of good Y

Country A's opportunity cost of producing 1 unit of good Y = 1/(1/6) = 6 unit of good X

Using 1 unit of labor Country B produces (1/6) unit of good X or (1/8) unit of good Y.

Country B's opportunity cost of producing 1 unit of good X = (1/8) /(1/6) = (6/8) = 0.75 unit of good Y

Country B's opportunity cost of producing 1 unit of good Y = (1/6) /(1/8) = (8/6) = 1.33 unit of good X

A country can specialize in the production of a good which it can produce at lower opportunity cost than others. So, it is clear from the above calculation that Country A has a comparative advantage in production of good X, because Country A produces good X at lower opportunity cost than Country B. And Country B has a comparative advantage in production of good Y, because Country B produces good B at lower opportunity cost than Country A.

Thus, Country A has a comparative advantage in good X and Country B has a comparative advantage in good Y.

Thus, option [b] is correct answer.