Unit 2 Assignment
March 13, 2017
Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade between individuals or countries? Is it absolute advantage or comparative advantage? Why?
“The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good” (Mankiw, 2015). “Comparative advantage the ability to produce a good at a lower opportunity cost than another producer” (Mankiw, 2015). “The gains from specialization and trade are based not on absolute advantage but on comparative advantage. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises. This increase in the size of the economic pie can be used to make everyone better off” (Mankiw, 2015).
Let us assume two students must prepare a presentation for their marketing class. As part of their class presentation, they must do a series of calculations and prepare 50 PowerPoint slides. It would take Larry 10 hours to do the required calculation and 10 hours to prepare the slides. It would take Kate 12 hours to do the series of the calculations and 20 hours to prepare the PPT slides.
How much time would it take the two students to complete the project if they divide the two tasks equally?
Larry 10 hours + Kate 12 hours = 22 hours/2 = 11 hours for the calculations; Larry 10 hours + Kate 20 hours = 30 hours/2 = 15 hours for the preparing of slides.
How much time would it take the two students to complete the project if they use comparative advantage and specialize in calculating or preparing slides?
Kate specialize in calculating = 12 hours + Larry specialize in preparing slides = 10 hours so it will take 22 hours to complete the project.
If Larry and Kate have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize in calculating or preparing slides?
It would cost Larry $50 for calculations ($5 * 10 hours) and $50 for preparing the slides ($5 * 10 hours); It would cost Kate $60 for calculations ($5 * 12 hours) and $100 for preparing the slides ($5 * 20 hours). So, Kate would need to hire Larry to do both the calculations and preparing the slides at $6 per hour for calculations and $7 per hour for slides which would be $60 for calculations and $70 for preparing slides. The project would only take 20 hours to complete.
Let us assume there are only two countries in the world, and the two countries face the following production possibilities frontiers. Further assume that the two countries produce popcorn and peanuts.
Country A’s Production Possibilities FrontierCountry B’s Production Possibilities Frontier
Assume that country A and country B decide to use half of the resources in the production of each good. Indicate the points of the maximum output of each good on the graphs for each country as point A under such resource use.
Country A would use 150/2 = 75 units of popcorn and 250/2 = 125 units of peanuts. Country B would use 300/2 = 150 units of popcorn and 100/2 = 50 units of peanuts.
Assume the two countries choose autarky and do not trade. What would be the total world production of popcorn and peanuts under the autarky?
Total World Population of popcorn would be 150 units + 75 units = 225 units of popcorn. Total World Population of peanuts would be 125 units + 50 units = 175 units of peanuts.`
Assume that each country decides to specialize in either popcorn or peanut based on its respective comparative advantage. Under the specialization, what is the total production of popcorn and peanuts?
The Comparative Advantage of Country A is their peanuts which would be 250 units. The Comparative Advantage of Country B is their popcorn which would be 300 units.
Assume country A and B decide to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country receives from trade. Label these points on the two graphs “B.”
Country A will give up 100 units of peanuts to Country B leaving Country A with 150 units of peanuts.
Country B will give up 100 units of popcorn to Country A leaving Country B with 200 units of popcorn.
Below are two graphs that representA through D.
Mankiw, N. G. (2015). Principles of Macroeconomics, 7th Edition. [Kaplan]. Retrieved from https://kaplan.vitalsource.com/#/books/9781305156067//