ECO101H1 Lecture Notes - Absolute Advantage, Comparative Advantage, Opportunity Cost

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Jane has absolute advantage in production of both cloth and corn. Jane now has an absolute advantage in the production of both cloth and corn. Yet john has a comparative advantage in the production of cloth, while jane has a comparative advantage in the production of corn. Observation: jane is now twice as productive in production of cloth and corn as in example 1 (where she could produce 8 cloth or 4 corn), so her opportunity cost of production each has not changed. Before trade, john and jane divided their time equally between the production of cloth and corn. After trade, john specializes completely in the production of cloth, while jane now allocates. 75% of her time ot the production of corn. With unchanged resources (ppfs), total output is higher if trade allowed. there are. If jane allocates 100% of her time to corn, then (after tade)

Related Questions

You are given the information shown in the table about production relationship in Pugelovia and Pomerania below:

	Labor Hours Per Unit of Rice	Labor Hours Per Unit of Cloth
Pugelovia	75	100
Pomerania	50	50

You make several Ricardian assumptions: these are the only two commodities, the productivity of labor is constant for each product no matter how much is produced, and competition prevails in all markets.

1)Compute the productivity of each country for each product. Which country has an absolute advantage at producing rice? Which country has an absolute advantage at producing cloth?

2)Compute the relative prices of each product in each country without trade. Which country has a comparative advantage at producing rice? Which country has a comparative advantage at producing cloth?

3)According to the theory of comparative advantage, which country would export rice? Which country would export cloth?

4)If Pugelovia and Pomerania are allowed to trade, what would be the limits for the relative price of rice? What would be the limit for the relative price of cloth?

5)Assume that no trade is allowed between the countries and that Pugelovia has 10,000 hours of labor available to use. If people want to consume rice and cloth in equal amounts, how much rice and how much cloth would Pugelovia produce?

6)Plot the production possibility curve for Pugelovia if it has 10,000 hours of labor available. Label the economyâs production of rice and cloth from part e point A on the PPC.

cerisegiraffe33

The following table shows the hourly output produced by one unit of labor in each country:

?	Cloth	Wine
Italy	1/10 yd per hour	1/12bl per hour
France	1/9 yd per hour	1/5bl per hour

?	Cloth	Wine
Italy	yds	bl
France	yds	bl
Total	?	?

Which country has a comparative advantage in wine? In clothing? Why?

Suppose that Italy has 11000 labor hours available and France has 15000 labor hours available. Further assume that, in autarky (closed to the rest of the world), Italy uses 5000 hours to produce cloth, and the rest to produce wine, while France uses 5000 hours to produce cloth. What are the outputs without specialization and trade (number of units)?

Suppose that the nations now alter their production patterns and engage in complete specialization in the goods in which they have a comparative advantage. What are the outputs? How much is gained from specialization?

?	Cloth	Wine
Italy	yds	bl
France	yds	bl
Gains	?	?

Consider two neighboring island countries called Felicidad and Contente. They each have 4 million labor hours available per month that they can use to produce jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor.

Country	Jeans	Corn
Country	(Pairs per hour of labor)	(Bushels per hour of labor)
Felicidad	8	32
Contente	12	24

Initially, suppose Contente uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of corn, and Contente produces 12 million pairs of jeans and 72 million bushels of corn. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of jeans and corn it produces.

Felicidad's opportunity cost of producing 1 pair of jeans is______ bushels of corn, and Contente's opportunity cost of producing 1 pair of jeans is______â bushels of corn. Therefore,______ has a comparative advantage in the production of jeans, and______ has a comparative advantage in the production of corn.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce______million pairs per month, and the country that produces corn will produce______million bushels per month.

In the following table, enter each country's production decision on the third row of the table (marked "Production").

Suppose the country that produces jeans trades 26 million pairs of jeans to the other country in exchange for 78 million bushels of corn.

In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."

When the two countries did not specialize, the total production of jeans was 36 million pairs per month, and the total production of corn was 104 million bushels per month. Because of specialization, the total production of jeans has increased by______million pairs per month, and the total production of corn has increased by______million bushels per month.

Because the two countries produce more jeans and more corn under specialization, each country is able to gain from trade.

Calculate the gains from tradeâthat is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

	Felicidad		Contente
	Jeans	Corn	Jeans	Corn
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	24	32	12	72
Consumption	24	32	12	72
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

ECO101H1 Lecture Notes - Absolute Advantage, Comparative Advantage, Opportunity Cost

ECO101H1 Full Course Notes

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