Absolute advantage vs comparative advantage

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Absolute Advantage vs Comparative Advantage Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer Principle of Comparative advantage: Each good should be produced by the individual that has the smaller opportunity cost of producing that good. This principle suggests that countries should specialize according to their comparative advantage.
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GESB 1006: Economics of Everyday Life University of Macau Specialization According to Comparative Advantage The opportunity cost of a computer is U.S.: 10 tons of wheat -Producing one computer requires 100 labor hours, which instead could produce 10 tons of wheat Japan: 5 tons of wheat in Japan: -Producing one computer requires 125 labor hours, which instead could produce 5 tons of wheat Japan has comparative advantage in computers
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GESB 1006: Economics of Everyday Life University of Macau Specialization According to Comparative Advantage Gains from trade arise from comparative advantage (differences in opportunity costs) When each country specializes in the good(s) in which it has a comparative advantage: Total production in all countries is higher The world’s “economic pie” is bigger All countries can gain from trade
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GESB 1006: Economics of Everyday Life University of Macau Absolute and Comparative Advantage Active Learning 4: Argentina has 10,000 hours of labor/month: producing 1 lb. coffee requires 2 hours; producing 1 bottle wine requires 4 hours Brazil has 10,000 hours of labor/month: producing 1 lb. coffee requires 1 hour producing 1 bottle wine requires 5 hours Q1. Which country has an absolute advantage in the production of coffee? Q2. Which country has a comparative advantage in the production of wine?
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GESB 1006: Economics of Everyday Life University of Macau Absolute and Comparative Advantage Active Learning 4: Solution to Q1: Brazil has absolute advantage in coffee. Producing 1 lb. coffee: -1 labor-hour in Brazil, but 2 in Argentina. Solution to Q2: Argentina: comparative advantage in wine ● Argentina’s opportunity cost of wine is 2 lb. coffee ● Brazil’s opportunity cost of wine is 5 lb. coffee
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GESB 1006: Economics of Everyday Life University of Macau In-Classroom Discussion: Trade between China and the United States “Some Americans who work in the production of competing goods, such as clothing and furniture, are made worse off by trade with China.”
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