COMPARATIVE AND ABSOLUTE ADVANTAGE ANSWERS

TASK 1 1.Opportunity cost (D) A.Ability of a country to produce a good using fewer resources than another 1.Comparative advantage (F) A.When trade takes place between countries through imports and exports 1.Absolute advantage (A) A.Economy that is self - sufficient (does not import or export goods) 1.Free trade (E) A.The value of the next best option that is given up to obtain something else 1.Open economy (B) A. When trade takes place without any barriers ( restrictions) 1.Closed Economy (C) A.One country has a lower opportunity cost than another when producing

TASK 1.2 TRUE A.Has the lowest opportunity cost to produce that good What should Harry and John do? Why? John should iron Harry should type Each should do the activity where the opportunity cost is the lowest NB: OC = what you give up what you want to do EG to iron a shirt 20/10 ….give up typing 2 pages etc A. The opportunity cost in Britain is lower than in France

TASK 1.3 Countries are not self - sufficient, even if they have good resources. They may benefit by specializing in the production of one (some) goods and importing the others… it may be cheaper. Yes, Country A has a comparative advantage in producing cars and country B in producing cheese. Theory of Comparative Advantage because Absolute advantage explains only a small part of the gains from specialization

TASK 1.4 ASSESSMENT TASK a) Country A in X, Country B in Y b) No when the 2 curves are parallel, countries face identical opportunity costs c) Country B has an absolute advantage in both goods d) Country B produce y Country A produce x e) When their opportunity costs are equal

TASK 1.5 COUNTRY ACOUNTRY B Good x82 Country A will produce X, Good y24 Country B will produce Y Good x82 Country A will produce X Good y64 Country B will produce Y Good x14 Country B will produce x Good y22 Country A will produce y Good x63 Country B will produce x Good y31 Country A will produce y Good x12 There is no gain for either country Good y24They should not trade

TASK 1.5 Let’s draw the curves!