230 Assignment Solution: Comparative Advantage

1. What does absolute advantage mean? How do you calculate absolute advantage?

Absolute advantage is determined by which country can produce a product with the lowest labor cost.

2. Which country has an absolute advantage in producing oil? Explain using the data from the table.

The U.S. requires 10 units of labor to produce a unit of oil.
Saudi Arabia requires 8 units of labor to produce a unit of oil.
Thus, Saudi Arabia has an absolute advantage in the production of oil.

3. Which country has an absolute advantage in producing personal computers? Explain using the data from the table.

The U.S. requires 30 units of labor per PC.
Saudi Arabia requires 4 units of labor per PC.
Thus, Saudi Arabia also has an absolute advantage in the production of PCs.

4. What does comparative advantage mean? How do you calculate comparative advantage?

A country has a comparative advantage when it can produce a good at a lower opportunity cost in terms of other goods. It can be calculated using a ppf.

5. In what output(s) does the U.S. have a comparative advantage? Explain using the data from the table.

The opportunity cost of a unit of oil in the U.S. is 10/30 = 0.33 PCs.
The opportunity cost of a unit of oil in Saudi Arabia is 8/4 = 2 units of oil.
Since the U.S. has a lower opportunity cost, it has a comparative advantage in oil.

6. In what output(s) does Saudi Arabia have a comparative advantage? Explain using the data from the table.

The opportunity cost of a PC in the U.S. is 30/10 = 3 units of oil.
The opportunity cost of a PC in Saudi Arabia is 4/8 = 0.5 units of oil.
Since Saudi Arabia has the lower opportunity cost it has a comparative advantage in PCs.

7. What product should each country export? Why?

According to the figures in the table, Saudi Arabia should specialize in the production of and export PCs, while the U.S. should specialize in and export oil.