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ID: 1112174 • Letter: Y
Question
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Columbia and France each have 10,000 hours of labor per month.
In France,
producing one pound coffee requires 2 hours
producing one bottle wine requires 4 hours
In Columbia,
producing one pound coffee requires 1 hour
producing one bottle wine requires 5 hours
1. Define comparative advantage. Define absolute advantage.
2. Which country has an absolute advantage in the production of coffee?
3. Which country has a comparative advantage in the production of wine?
Explanation / Answer
1. Comparative advantage:
A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.
Absolute advantage:
Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.
2. France can produce 10,000/2 = 5000 pounds of coffee
Columbia can produce 10,000/1 = 10,000 pounds of coffee
Columbia is able to produce more pounds of coffee with the same resources. So, Columbia has an absolute advantage in the production of coffee.
3. France:
5000 pounds of coffee = 2500 bottles of wine
1 bottle of wine = 5000/2500 = 2 pounds of coffee
Opportunity cost of wine is 2 pounds of coffee in France.
Columbia:
10000 pounds of coffee = 2000 bottles of wine
1 bottle of wine = 10000/2000 = 5 pounds of coffee
Opportunity cost of wine is 5 pounds of coffee in Columbia.
Opportunity cost of producing wine is less in France. So, France has comparative advantage in the production of wine.