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Absolute v. Comparative Advantage

Last updated over 2 years ago
13 questions
Note from the author:
Through this goformative you will learn how to do the following four economic skills:

1. Determine which country has an ABSOLUTE ADVANTAGE in producing each product.
2. Calculate the OPPORTUNITY COST for producing one of each product.
3. Identify which country has a COMPARATIVE ADVANTAGE in producing each product.
4. Identify a TERMS OF TRADE that benefits both countries.
Through this goformative you will learn how to do the following four economic skills:

1. Determine which country has an ABSOLUTE ADVANTAGE in producing each product.
2. Calculate the OPPORTUNITY COST for producing one of each product.
3. Identify which country has a COMPARATIVE ADVANTAGE in producing each product.
4. Identify a TERMS OF TRADE that benefits both countries.
1

Which country has an ABSOLUTE ADVANTAGE in producing each product?

1

South Africa can produce 3 cars or 9 motorcycles.
Liberia can produce 4 cars or 8 motorcycles.

Which country has the ABSOLUTE ADVANTAGE in each of the products?

  • Cars
  • Motorcyles
  • South Africa
  • Liberia
1

India can produce 4 laptops or 12 phones.
Malaysia can produce 1 latop or 5 phones.

Which country has the ABSOLUTE ADVANTAGE in each of the products?

  • Phones
  • Laptops
  • India
  • Malaysia
1

Read these statements carefully. They're worded differently.

Cuba takes 4 hours to make a car and 12 hours to make microchips.
Mexico takes 1 hour to make a car and 5 hours to make microchips.

Which country has the absolute advantage in each of the products?

  • microchip
  • car
  • Cuba
  • Mexico
OK, I think we got ABSOLUTE ADVANTAGE. Say it in your own words to your friend next to you.

Let's work on skills #2-#3.

2. Calculate the OPPORTUNITY COST for producing one of each product.

Now, let's seeses which country has a COMPARATIVE ADVANTAGE in producing each product.
1
1

Let's say that each country is diversifying its production.

What is the opportunity cost for producing one of each product? Remember the PPC?

The US can produce 20 planes OR 2 cruise ships.

France can produce 12 planes OR 2 cruise ships.

In other words, how much does each 1 unit of each product cost in terms of the other possible product, i.e. per unit opportunity cost?

Fill in the blank in the matrix below.

1

Now, let's do skill #3, which country has the COMPARATIVE ADVANTAGE in planes?

Refill, the cost per unit in each cell from the above question.

To find which country has the comparative advantage in planes, 👀 at the planes column ONLY. 👀

Then, compare the cost per unit. The smaller number shows that that country has a COMPARATIVE ADVANTAGE in making planes compared to the other country.

Now, circle the country that has the COMPARATIVE ADVANTAGE in the production of planes.

1

Now, let's do skill #3, which country has the COMPARATIVE ADVANTAGE in cruise ships?

Refill, the cost per unit in each cell from the above question and put a strike through the bolded output numbers so you only focus on the opportunity costs.

Using what you learned from the question above, circle the country that has the COMPARATIVE ADVANTAGE in the production of cruise ships.

1

Look at your cost per unit numbers from your work in the above question.

Who has the COMPARATIVE ADVANTAGE in plane production? In other words, who has to give up less cruise ships to make planes?

1

Now, who has the COMPARATIVE ADVANTAGE in cruise ships?

1

Based on the last two questions, can a country have a COMPARATIVE ADVANTAGE in both products?

Now, explain to your friend what the difference is between absolute advantage and comparative advantage and why these concepts matter in trade.

Let's work on leveling up our economic thinking skills by tackling skill #4.

4. Identify a TERMS OF TRADE that benefits both countries.
1
1

What are the TERMS OF TRADE that benefit both countries?
In other words, what range of planes should they trade for 1 cruise ship?
Circle the range of numbers of what makes sense from each country's perspective.