COMPARATIVE ADVANTAGE WORKSHEET by parpar

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									Advanced Placement Economics                                         _________________________
Mr. E. Underhill                                                           September 11, 2008
                       COMPARATIVE ADVANTAGE WORKSHEET

Problem 1
Assume there are only two countries in the world, Norway and the United States. Each of
these countries produces only two goods, chocolate (C) and computer software (S), according
to the following production possibilities schedules:

                                Norway                          United States

Production Alternative (C)              (S)             (C)             (S)

A                        0              120             0               480
B                       10              100            20               400
C                       20               80            40               320
D                       30               60            60               240
E                       40               40            80               160
F                       50               20            100               80
G                       60                0            120                0

** Graph each of these production possibility curves on the same graph in two different
colors. Be sure to label each curve clearly.**

a. In Norway, what is the opportunity cost of producing more chocolate? Computer
software?

b. In the United States, what is the opportunity cost of producing more chocolate? Computer
software?

c. Which country has the comparative advantage in the production of chocolate? Software?

d. If each country were to specialize in the production of the good for which it has a
comparative advantage, then it would have to trade, swap that good in exchange for some
units of the other good it would like to have. What would be a fair terms of trade? In other
words, how much could one unit of chocolate trade for in terms of computer software which
would be mutually beneficial to both countries? (How much could one unit of computer
software trade for in terms of chocolate which would be mutually beneficial to both
countries?) Why would this be a fair terms of trade?

e. Suppose each country does specialize in the production of the good for which it has a
comparative advantage. Also assume each country would desire “Production Alternative C”
if it were to produce both chocolate and computer software for itself. If the countries
specialize and trade according to the terms of trade determined above, what would be the
combination of chocolate and computer software each country could consume?

f. Is specialization and trade along the lines of comparative advantage mutually beneficial to
all economies involved?

								
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