Question

Consider following production possibilities for two countries

	Baguettes	Cars
Germany	1000 million	1 million
France	2000 million	.8 million

Which of the following is true?

Group of answer choices

France has an absolute advantage in the production of baguettes

Germany has an absolute advantage in the production of both goods

France has a comparative advantage in the production of cars

France has an absolute advantage in the production of both goods

Answer 1

OPTION A ,C,D IS CORRECT AND OPTION B IS INCORRECT .

EXPLANATION

ABSOLUTE ADVANTAGE : when a country produce more of particular good than another country using a certain amount of resources .

France has ABSOLUTE ADVANTAGE in both good as they produced both good more than Germany .( 2000 is greater than 1000 ) also ( 8 million greater than 1 million ) .

So OPTION A IS CORRECT

OPTION B IS INCORRECT

OPTION D IS CORRECT

COMPARATIVE ADVANTAGE : when a country produce good at lower opportunity cost than other country .

Now we have to find opportunity cost

Opportunity cost of BAGUETTE in GERMANY = 1/1000

= 0.001

Opportunity cost of BAGUETTE in FRANCE = 8/2000

= 0.004

As you see opportunity cost of BAGUETTE is lower in GERMANY , SO Germany has comparative advantage in PRODUCING BAGUETTE .

opportunity cost of cars in GERMANY = 1000/1 =1000

opportunity cost of cars in FRANCE = 2000/8 = 250

Opportunity cost of cars is lower in France , so france has comparative advantage in cars . OPTION C IS CORRECT