Absolute & Comparative Advantage Lecture Notes PDF

Absolute Advantage Assumption of Theories Of Absolute & Comparative Advantage: There are two countries and two products considered at a time. There is a free Mobility of Resources. No Indirect Taxes. Example: Countries have 120 hours available for Production of both goods, 80hrs in the product...

Absolute Advantage Assumption of Theories Of Absolute & Comparative Advantage: There are two countries and two products considered at a time. There is a free Mobility of Resources. No Indirect Taxes. Example: Countries have 120 hours available for Production of both goods, 80hrs in the production Countries of Food and Food/hour 40hrs in the Machinery/ production of Machinery. hour Pakistan 11 06 China 10 16  Theory Of Absolute Advantage Before trade situation Pakistan Food = 11*80 = 880 units Machinery = 6 * 40 =240 units China Food = 10 * 80 = 800 units Machinery = 16 * 40 = 640 units Economy’s total food Production = 880 + 800=1680 units Economy’s total Machines Production = 240 + 640=880 units Economy’s overall Production = 1680 +880= 2560 units  Theory Of Absolute Advantage After Trade Situation: Pakistan has Absolute Advantage in the production of Food China has Absolute Advantage in the production of Machines Pakistan Food = 11*120 = 1320 units China Machines = 16 * 120 = 1920 units Economy’s total food production = 1320 units Economy’s total Machines production = 1920 units Economy’s overall production = 3240 units Countries Gains from Trade  Theory of Comparative Advantage Example: total hours available is 138 hours Opportunity Cost = units giveup/ units produced Countri Food Opportu Machin Opportu es nity cost es nity cost of of food machine s Pakistan 11 6/11= 06 11/6 = 0.54 1.83 China 11 16/11 = 16 11/16 = 1.45 0.68  Theory of Comparative Advantage Before Trade Situation Pakistan Food = 11*69 = 759 Units Machines = 6*69 = 414 units China Food = 11*69 = 759 units Machines = 16*69 =1104 units Economy’s total food production = 1518 units Economy’s total machines production = 1518 units Economy’s overall Production = 3036 units  Theory of Comparative Advantage Pakistan has Comparative Advantage in Food China has Comparative Advantage in Machines After Trade Situation Pakistan Food = 11*138 = 1518 units China Machines = 16*138 = 2208 units Economy’s total food production = 1518 units Economy’s Total Machines Production = 2208 units Economy’s overall production = 3726 units Countries Gains from trade.  Practice Question If countries have 190 hours available than calculate Absolute Advantage. Countries Weapons Handicrafts China 93 29 India 78 38  Practice Question If a country have 190 hours available than calculate their Comparative Advantages. 80% time utilized in the production of Weapons 20% time utilized in the production of Handicrafts Opportu Opportu Countri Weapo nity Handicr nity es ns cost of afts cost of Weapons Handicra fts China 93 38 India 78 38