When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Yosemite and Rainier. Both countries produce almonds and lentils, each initially (i.e., before specialization and trade) producing 6 million pounds of almonds and 3 million pounds of lentils, as indicated by the grey stars marked with the letter A. LENTILS (Millions of pounds) 16 14 12 10 8 6 PPF Yosemite A 2 0 0 2 4 6 8 10 12 14 16 ALMONDS (Millions of pounds) LENTILS (Millions of pounds) 16 14 12 10 8 PPF Rainier A 6 4 2 0 0 2 4 6 8 10 12 14 16 ALMONDS (Millions of pounds) Yosemite has a comparative advantage in the production of lentils ?, while Rainier has a comparative advantage in the
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Consider an economy that consists of two countries, A and B, that can produce two goods, indexed by 1 and 2. Labour is the only factor of production. The unit labour requirements in the production of goods 1 and 2 are given in the following table: | | Good 1 | Good 2 | |---|---|---| | Country A | 1 | 2 | | Country B | 8 | 40 | Yic denotes the production of good i in country c and Rc the revenue of country c. Preferences are assumed to be identical across countries. The demand for each good is given by: D1c = 2Rc * sqrt(p2c/p1c) and D2c = 2Rc * sqrt(p1c/p2c) where pic is the price of good i in country c. Country A has 1000 units of labour available, and country B has 16000 units of labour. In both countries, production occurs under conditions of perfect competition and labour can move across sectors at no cost. 1. Express the price of both goods in country A as a function of wage and unit labour requirements. 2. What is the relative price of good 1 in terms of good 2 in country A under autarky? 3. What is the equilibrium output of each good in country A? 4. Which country has an absolute advantage in the production of good 1? 5. Which country has a comparative advantage in the production of good 1? Good 2? 6. If the relative price of good 1 in terms of good 2 is 0.4, what is the world supply of each good? 7. Construct the world relative supply curve. 8. Graph the relative demand curve along with the relative supply curve. 9. Find the equilibrium world relative price under free trade. 10. Show graphically that both countries A and B gain from trade. 11. How much of each good does either country produce under free trade? How much of each good will they import/export? 12. Under free trade, what is the wage ratio between country A and country B?
Akash M.
2. Comparative and absolute advantage Loc and Ashima are farmers. Each one owns an 18-acre plot of land. The following table shows the amount of maize and squash each farmer can produce per year on a given acre. Each farmer chooses whether to devote all acres to producing maize or squash or to produce maize on some of the land and squash on the rest. Maize (Pounds per acre) Squash (Pounds per acre) Loc 28 7 Ashima 18 6 On the following graph, use the blue line (circle symbol) to plot Loc's production possibilities frontier (PPF), and use the purple line (diamond symbol) to plot Ashima's PPF. Question: Loc has an absolute advantage in the production of maize, and Ashima has an absolute advantage in the production of squash. Loc's opportunity cost of producing 1 pound of squash is _____ pounds of maize, whereas Ashima's opportunity cost of producing 1 pound of squash is _____ pounds of maize. Because Loc has a _____ opportunity cost of producing squash than Ashima, _____ has a comparative advantage in the production of squash, and _____ has a comparative advantage in the production of maize.
12. You are given the following production possibilities table for country A and country B in bread and butter production. 1) Which country has an absolute advantage in bread production? 2) Which country has an absolute advantage in butter production? 3) Make an opportunity cost table for the two countries. 4) Which country has a comparative advantage in bread production? 5) Which country has a comparative advantage in butter production? 6) Construct a table of production for the two countries with specialization. What is the total quantity of bread produced and what is the total quantity of butter produced? 7) If country A chooses to produce 4 units of butter, what quantity of bread can it produce? 8) If country B chooses to produce 5 units of bread, what quantity of butter can it produce? 9) Is "8 bread and 2 butter" a possible production combination for country A? 10) Following 7) and 8), construct a table of production for the two countries without specialization. What is the total quantity of bread produced and what is the total quantity of butter produced? 11) How many units are gained from specialization? 12) What is the range of possible price for bread if the two countries trade?
Aarya B.
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