Identify: a) which country has the absolute advantage, b) which country has the comparative advantage, c) which country is at a comparative disadvantage, and in which product does... Identify: a) which country has the absolute advantage, b) which country has the comparative advantage, c) which country is at a comparative disadvantage, and in which product does it have the least comparative disadvantage? Demonstrate how the countries would benefit from specializing and trading.
Understand the Problem
The question asks for the identification of absolute and comparative advantages between two countries based on their production of motor vehicles and television sets. It also seeks to demonstrate the benefits of specialization and trade. This involves economic concepts of absolute advantage, comparative advantage, and analysis of trade benefits.
Answer
a) Pacifica; b) Pacifica (motor vehicles), Europa (television sets); c) Pacifica (least disadvantage in television sets).
a) Pacifica has the absolute advantage in both products. b) Pacifica has a comparative advantage in motor vehicles; Europa has it in television sets. c) Pacifica is at a comparative disadvantage in television sets, with the least comparative disadvantage in television sets. Specializing and trading will benefit both by increasing total production.
Answer for screen readers
a) Pacifica has the absolute advantage in both products. b) Pacifica has a comparative advantage in motor vehicles; Europa has it in television sets. c) Pacifica is at a comparative disadvantage in television sets, with the least comparative disadvantage in television sets. Specializing and trading will benefit both by increasing total production.
More Information
Absolute advantage refers to the ability of a country to produce more of a good with the same resources than another country. Comparative advantage is driven by opportunity costs, indicating which country should specialize in what good.
Tips
Common mistakes include confusing absolute and comparative advantage, and not calculating opportunity costs correctly.
Sources
- Absolute vs. Comparative Advantage: What's the Difference? - investopedia.com
- Lesson summary: Comparative advantage and gains from trade - khanacademy.org
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