Question

Suppose that output per worker in the U.S. and Germany is given by the following:

Wheat              Cars

U.S.                                             200                  100

Germany                                   100                  50

Which of the following is true?

	a.	the U.S. has an absolute advantage in both products and comparative advantage does not exist
	b.	the U.S. has an absolute advantage in both products and Germany has a comparative advantage in wheat
	c.	the U.S. has an absolute advantage in both products, but Germany has a comparative advantage in cars
	d.	the U.S. has an absolute and comparative advantage in both products

Answer 1

Absolute advantage in a good means that an economy can produce more of that good as compare to the other country.

Here In US, a worker can produce 200 units of wheat while on the other hand Germany can produce only 100 units of wheat so here US has an absolute advantage in production of wheat.

In production of Cars, US can produce at the rate of 100 cars per worker while on the other hand Germany can produce at the rate of only 50 cars per worker. SO here as well US has an absolute advantage in production of cars.

US has absolute advantage in production of both the goods.

Comparative advantage means an economy can produce a particular good with lower opportunity cost as compare to its competitor.

In US, the opportunity cost of producing an extra unit of Wheat is 1/2 units of car while on the other hand, opportunity cost of producing an extra unit car is 2 units of wheat.

Opportunity cost for wheat is same in both the countries.

In Germany, the opportunity cost of producing an extra unit of Wheat is 1/2 units of car while on the other hand, opportunity cost of producing an extra unit car is 2 units of wheat.

Opportunity cost for Car is same in both the countries.

Opportunity cost for wheat is same in both the countries

So here, comparative advantage does not exist.

Correct answer is:

a.	the U.S. has an absolute advantage in both products and comparative advantage does not exist