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Without Trade question Number 15?
Without Trade question number 15?
With Specialization and Trade question number 16?
Comparative Advantage of Bikes
10. If Country A chooses to build one bike, how many cars would it give up finishing?
11. If Country B chooses to build one bike, how many cars would it give up finishing?
12. Which country has a comparative advantage of producing bikes?
Specialization based on the Law of Comparative Advantages
13. Which country should specialize in producing cars? Country B
Without Trade
Assume that both countries exist in a world without trade and have 2,000 labor hours available. They both decided to allocate half of those resources to each product - 1,000 hours to building cars and 1,000 hours to assembling bikes.
15. What would the total world output be?
Total outputs without specialization
Cars
Bikes
Country A
Country B
Total
With Specialization and Trade
Now, assume that both countries specialize in the production in which they have a comparative advantage and participate in trade. Each has 2,000 labor hours available.
16. What would the total world output be?
Total outputs without specialization
Cars
Bikes
Country A
Country B
Total
Comparative Advantage
The concept of comparative advantage suggests that as long as two countries (or individuals) have different opportunity costs for producing similar goods, they can profit from specialization and trade. If both of them focus on producing the goods with lower opportunity costs, their combined output will increase and all of them will be better off.
