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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