Comparative advantage

[Benjamin]

Hi,

I've been doing passed questions and note that they have two forms - a single product takes a certain number of labour hours to produce in each of two countries OR for one unit of labour and capital, country A produces x of good X or y of good Y.
For the second type, I can't seem to get a solution method that provides consistent results - could you clarify the solution method (the two questions that come to mind are Revision Booklet 4, multiple choice questions 4 (correct answer given as B) and MC question 15 (correct answer given as A).

Thanks!

 

[Graham Aylott]

Hi,

You use the same logic here in terms of working out the opportunity costs, only the "other way around" to the usual case, where you're given the number of hours needed to produce each unit.

X can produce either 5 bikes or 2 cars with 1 unit each of labour and capital. So, if it produces 5 more bikes, it gives up the chance to produce 2 more cars. So, the opportunity cost of each extra bike it makes is 2/5 of a car. Likewise, if it produces 2 more cars, it gives up the chance to produce 5 more bikes and so the opportunity cost of each extra car is 5/2 bikes.

Y can produceeither 6 bikes or 4 cars with 1 unit each of labour and capital. So, if it produces 6 more bikes, it gives up the chance to produce 4 more cars. So, the opportunity cost of each extra bike it makes is 4/6 of a car. Likewise, if it produces 4 more cars, it gives up the chance to produce 6 more bikes and so the opportunity cost of each extra car is 6/4 bikes.

So, X has the lower opportunity cost, and hence the comparative advantage in producing bikes, whilst Y has the lower opportunity cost, and hence the comparative advantage in producing cars.

In addition, Y has the absolute advantage in both goods and it can produce more of each good than X, using the same 1 unit of labour and capital.