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					Comparative Advantage VS Absolute Advantage

Standard Question
Which country has Absolute Advantage in producing bread (or car)?
Which country has Comparative Advantage in producing bread (or car)?


                                          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
                absolute advantage on bread.
                3<4 implies that country B has absolute
                advantage on car, too
                                                          Comparative Advantage
                                                                Country B has comparative advantage on bread.
                                                                Then automatically Country A has comparative
                                                                advantage on car.

                                                                                                      Presented by Seunggyu Sim
Comparative Advantage VS Absolute Advantage

Standard Question
Which country has Comparative Advantage in producing bread (car)?

                  Start from Opportunity Cost !!
                                                               OUPUT

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


                                                              Opportunity Cost

                                               bread                                   car

                   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
      So, Country B has comparative advantage on bread and Country A has comparative advantage on car.


                                                                                                     Presented by Seunggyu Sim
Comparative Advantage VS Absolute Advantage

Confusing Trick I (frequently used in Exam)
Which country has Absolute Advantage in producing bread (car)?
Which country has Comparative Advantage in producing bread (car)?

                               INTPUT

                    bread                    car

     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

                                                                                   bread                 car

                                                                 A                 1/12                  1/3

                                                                 B                 1/24                  1/4


                                                                                                      Presented by Seunggyu Sim
Comparative Advantage VS Absolute Advantage

Confusing Trick I (frequently used in Exam)

                                 INPUT                                                           OUTPUT

                     bread                    car                                     bread                   car

   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
Comparative Advantage VS Absolute Advantage

Confusing Trick II (frequently used in Exam)
Which country has Absolute Advantage in producing bread (car)?
Which country has Comparative Advantage in producing bread (car)?

                                     A                       B

                bread               12                       3
   output
                 car                24                       4



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

                                                                                               OUTPUT

                                                                                   bread                        car

                                                                   A                 12                         24

                                                                   B                  3                         4

  TA’s advice
  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
  Comparative Advantage VS Absolute Advantage

   Application I

           Quantity of
                         100
      Bread Produced




                  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
                                                                            comparative advantage on both goods.
• 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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posted:10/19/2010
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