Exercises: Comparative Advantage and Trade

Define absolute advantage and comparative advantage. Then explain which of the two is based on opportunity cost.

In one hour, Emma can mow 2 lawns or trim 4 hedges. Calculate Emma's opportunity cost of mowing one lawn, in hedges, and her opportunity cost of trimming one hedge, in lawns.

Liam can make 10 sandwiches or 5 salads in an hour. Sofia can make 6 sandwiches or 4 salads in an hour. Who has the absolute advantage in making sandwiches? Who has the absolute advantage in making salads? Explain.

In one day, Texas can produce 120 tons of beef or 60 tons of cotton. Oklahoma can produce 80 tons of beef or 80 tons of cotton. Assume both have constant opportunity costs.

(a) Calculate each state's opportunity cost of 1 ton of beef, in tons of cotton.

(b) Which state has the comparative advantage in beef? In cotton?

(c) Does either state have an absolute advantage in both goods? Explain.

Marcus and Priya work for a day on a school project. In one hour, Marcus can write 3 pages or make 6 slides. Priya can write 2 pages or make 8 slides.

(a) Find each student's opportunity cost of one page, in slides.

(b) Who should specialize in writing pages and who in making slides? Explain.

(c) Give a trade, as a price of one page in slides, that would make both students better off, and justify it.

The table shows how many units each country produces in one hour of labor.

(a) Which country has the absolute advantage in each good?

(b) Calculate each country's opportunity cost of one car, in bicycles.

(c) Which country has the comparative advantage in cars? Explain why Country Y can still gain from trade even though it has no absolute advantage.

Two neighboring countries, Alpha and Beta, each have 100 hours of labor available per week and constant opportunity costs. Hours needed to produce one unit:

(a) Calculate the maximum output of each good for each country if it devotes all hours to that good.

(b) Calculate each country's opportunity cost of one ton of wheat in tons of rice, and determine who has the comparative advantage in each good.

(c) Without trade, each country splits its hours equally between wheat and rice. Calculate the total output of each good for each country, and the world totals.

(d) Now each country specializes completely in the good in which it has a comparative advantage. Calculate world production of each good.

(e) Alpha trades 10 tons of wheat to Beta in exchange for 8 tons of rice. Decide whether each country is better off compared with part (c), using Alpha's and Beta's consumption of each good, assuming Alpha has all of its wheat to trade and Beta has all of its rice to trade after the specialization in part (d).

Jayden and Camila run a lemonade stand and a cookie stand, working 8 hours a day. In one hour, Jayden can make 20 cups of lemonade or 10 cookies. Camila can make 12 cups of lemonade or 8 cookies.

(a) Calculate each person's opportunity cost of one cookie, in cups of lemonade.

(b) Determine who has the comparative advantage in each good, and whether either has an absolute advantage in both.

(c) Find the range of prices, in cups of lemonade per cookie, at which trade would benefit both. Explain why prices outside the range would not.

(d) Suppose they specialize according to comparative advantage and work all 8 hours each. Calculate total production of each good. Compare it with the total if each splits time equally between the two goods.

(e) Explain whether a price of 1.9 cups of lemonade per cookie is mutually beneficial, and who gains more at that price.