INTRODUCTION TO THE GLOBAL ECONOMY – ABSOLUTE AND COMPARATIVE ADVANTAGE
Question 1:
Tons produced per hour
Yogurt
Cheese
Ted
Nancy
60
45
25
40
Who has an absolute advantage in the production of yogurt?
Who has an absolute advantage in the production of cheese?
What would the PPF look like for these two products for the individuals?
What does your diagram tell you about the production of yogurt and trucks by the two individual’s
countries? Should they trade?
Calculate the opportunity costs for the production of yogurt and cheese by both individuals:
Yogurt
Cheese
Ted
Nancy
Should the individuals specialise and trade? Explain your answer
INTRODUCTION TO THE GLOBAL ECONOMY – ABSOLUTE AND COMPARATIVE ADVANTAGE
Question 2:
Maximum outputs per year
Cars
Trucks
Country A
Country B
30m
35m
6m
21m
Which country has an absolute advantage in the production of cars?
Which country has an absolute advantage in the production of trucks?
What would the PPF look like for these two products for the two countries?
What does your diagram tell you about the production of cars and trucks across the two countries?
Should they trade?
Calculate the opportunity costs for the production of cars and trucks in both countries:
Cars
Trucks
Country A
Country B
Should the two countries specialise and trade? Explain your answer
INTRODUCTION TO THE GLOBAL ECONOMY – ABSOLUTE AND COMPARATIVE ADVANTAGE
Question 3:
Acres of land per bushel
Apples
Pears
Tony
Chris
5
6
2
3
Who has an absolute advantage in the production of apples?
Who has an absolute advantage in the production of pears?
Calculate the opportunity costs for the production of Apples and Pears for both individuals:
Apples
Pears
Tony
Chris
Should the two individuals specialise and trade? Explain your answer
Question 4:
Hours taken to produce 1 unit
Laptops TV’s
Country A
Country B
7
6
3
2
Who has an absolute advantage in the production of laptops?
Who has an absolute advantage in the production of TV’s?
Calculate the opportunity costs for the production of Laptops and TV’s in both countries:
Laptops
Country A
Country B
TV’s
INTRODUCTION TO THE GLOBAL ECONOMY – ABSOLUTE AND COMPARATIVE ADVANTAGE
Should the two individuals specialise and trade? Explain your answer
Question 4: Multiple choice
According to the theory of comparative advantage, which of the following is not a reason why
countries trade?
a. Comparative advantage.
b. Costs are higher in one country than in another.
c. Prices are lower in one country than in another.
d. The productivity of labour differs across countries and industries.
e. Exports give a country a political advantage over other countries that export less.
According to the theory of comparative advantage, countries gain from trade because
a. Trade makes firms behave more competitively, reducing their market power.
b. All firms can take advantage of cheap labour.
c. Output per worker in each firm increases.
d. World output can rise when each country specializes in what its does relatively best.
e. Every country has an absolute advantage in producing something.
If international trade takes place as a result of comparative advantage, it will cause which of the
following effects in the participating countries?
a. Inequality among households will be reduced.
b. All individuals in each country will be better off.
c. The average well-being of people in both countries will increase.
d. Both countries will grow faster over time.
e. All of the above.