# ca

Document Sample

```					Comparative Advantage VS Absolute Advantage

Standard Question

OUTPUT

bread                        car                       How can we get the
opportunity cost?
A                     12                          3                        =>go to the next page

B                     24                          4

Opportunity Cost
Absolute Advantage:                                        A’s O.C. for bread in terms of car: ¼ car
12<24 implies that Country B has                       B’s O.C. for bread in terms of car: 1/6 car
3<4 implies that country B has absolute
Then automatically Country A has comparative

Presented by Seunggyu Sim

Standard Question

Start from Opportunity Cost !!
OUPUT

A                 12                     3
B                 24                     4           The inequalities are
always crossing. Why?

Opportunity Cost

A                       1/4 units of car                      4 units of bread

B                       1/6 units of car                      6 units of bread

Professor’s Tip (opportunity cost)
A’s opportunity cost for bread in terms of car: 12 X bread = 3 X car => bread = ¼ car
B’s opportunity cost for bread in terms of car: 24 X bread = 4 X car => bread=1/6 car

Presented by Seunggyu Sim

Confusing Trick I (frequently used in Exam)

INTPUT

A               12                       3

B               24                       4

What’s the difference ?
• the figure in the Input table : the quantity needed to produce 1 unit of output
• the figure in the Output table : the quantity produced by 1 unit of input

Check first what figures mean !!
To get the output table from the input table, take the reciprocal of each figure.
OUTPUT

A                 1/12                  1/3

B                 1/24                  1/4

Presented by Seunggyu Sim

Confusing Trick I (frequently used in Exam)

INPUT                                                           OUTPUT

A                  12                       3                    A                  12                      3

B                  24                       4                    B                  24                      4

• the figure in the Input table : the quantity needed to produce 1 unit of output
• the figure in the Output table : the quantity produced by 1 unit of input

Check first what figures mean !!

In order to produce 1 unit of bread, A needs 12 workers.
In order to produce 1 unit of car, A needs 3 workers.

So, In order to produce 1 unit of bread, it should give up 4 units of car.
By the same reasoning in order to produce 1 unit of car, it should give up ¼ unit of bread.

With 1 unit of workers, A can produce 12 units of bread.
With 1 unit of workers, A can produce 3 units of car.

So, In order to produce 1 unit of bread, it should give up ¼ units of car.
By the same reasoning in order to produce 1 unit of car, it should give up 4 units of bread.

Presented by Seunggyu Sim

Confusing Trick II (frequently used in Exam)

A                       B

output
car                24                       4

What’s the difference ?                 => the table is transposed.

OUTPUT

A                 12                         24

B                  3                         4

In both tricky questions (Trick I & II), you may solve them without converting the table if you are very very smart.
But you might be confused in exam situation. So I strongly recommend that you convert the table to the output
table first. Additionally, no matter which way you prefer, you should check what figures mean first!!
(input or output)

Presented by Seunggyu Sim

Application I

Quantity of
100

20                   Assuming that both country have same workers.

80

50                    Quantity of
Cars Produced
• What is the opportunity cost of producing one more car for each         Application II (true or false)
country ?                                                               • Generally, it is possible for one country to have
• Present the table.                                                        absolute advantage on both goods

• Determine which country specializes in cars (or computers).             • Generally, it is possible for one country to have
• How many cars are produced in these two countries?
• If the rich country has absolute advantage on
• Is it possible that both countries gain from trade? Explain.             both goods, then it doesn’t have to trade with the
other poor country.
• We can say that Trade always make both country
be better off.

Presented by Seunggyu Sim

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