Answers to Comparative Advantage and Absolute Advantage Practice Problems

1. A

 

2, Typo in the answers.  Absolute advantage for both goods is Country A.  Comparative advantage for manufacturing goods is B, and comparative advantage for service goods is A.

 

3. C (This is an output problem.)

 

4. D (You must rotate the information, so the two countries are on the side, and the outputs are across the top!)

 

5.

a. Create the table with only one country, Canada.

b. 1/15th of a car.

c. Straight line PPF.  Make sure everything is labeled (axes, title, all numbers provided).  You must multiple everything by 10 million, since there are 10 million workers.

d. 150 million bushels of wheat

e. 200 million bushels of wheat (Assume Canada specializes in car production and can produce 20 million cars.  If it trades 10 million cars to the United States, then it is left with 10 million cars.  For each car that it traded, it received 20 bushels of wheat. 20*10 million = 200 million bushels of wheat) Canada should accept the deal because they are now consuming at a point outside of its PPF.

 

6. 

a. Absolute advantage for scones is England.  Absolute advantage for sweaters is Scotland.

b. Draw the table, calculating opportunity costs of producing each good in each country.

c. England (lower opportunity cost, 1/50 < 1/40)

d. Scotland (lower opportunity cost, 20 < 50)

e. Scotland will trade sweaters since it has the comparative advantage in sweater production.

f. Yes.  Scotland would still have the comparative advantage in sweater production, and England would still have the comparative advantage in scone production.  More importantly, however, is that both countries would gain from trade by being able to consume outside of their respective production possibilities frontiers (PPFs).

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