Chapter 3 in our text introduces the concepts of "absolute" and "comparative" advantage with regards to ability to make certain products. These concepts form the basis for international trade.
Review the definitions of these terms carefully, remembering that opportunity cost is what is given up to get something else (in this case, widgets are given up for gadgets, and vice versa), then consider the following scenario:
Depending upon how they allocate their resources:
Country A can produce 10 widgets per hour OR 25 gadgets per hour.
Country B can produce 15 widgets per hour OR 50 gadgets per hour.
- Which country has an ABSOLUTE advantage in producing widgets?
- Which country has an ABSOLUTE advantage in producing gadgets?
- Which country has a COMPARATIVE advantage in producing widgets?
- Which country has a COMPARATIVE advantage in producing gadgets?
- Is it possible for a country to have an absolute advantage in one of the products, yet not have comparative advantage in producing that product?
- If these countries were to engage in international trade, which product(s) would each country make?
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