1.(Mexico, the United States) 2.(0.25 of a pair of shoes in Mexico, 0.25 of a pa
ID: 1120789 • Letter: 1
Question
1.(Mexico, the United States)
2.(0.25 of a pair of shoes in Mexico, 0.25 of a pair of shoes in the United States, 0.8 of a pair of shoes in the United States)
3.(0.25 of a pair of shoes in Mexico, 0.8 of a pair of shoes in Mexico, 0.8 of a pair of shoes in the United States)
4.(the United States, Mexico)
5.(decreases, increases)
6.(larger, smaller) and they will collectively
7.(fewer, more) goods and services
8.(rises, falls, remains the same) as a result
CAROLINE: Hi, Antonio! I was hoping you could help me understand the example described in Exhibit 7-1. What confuses me the most is how do we find absolute advantage in the production of a good and how is it different from comparative advantage? Exhibit 7-1: Output per worker United States 250 pairs of shoes 1,000 refrigerators Mexico 200 pairs of shoes 250 refrigerators ANTONIO: Sure, Caroline! What we have here is a hypothetical economy in which the U.S. and Mexico produce shoes and refrigerators. In the U.S., one worker can produce 250 pairs of shoes or 1,000 refrigerators, while one worker in Mexico can produce 200 pairs of shoes or 250 refrigerators. Clearly, the U.S. has an absolute advantage in the production of both goods. What about a comparative advantage in producing shoes and refrigerators? A nation has a comparative advantage if it can produce a product at a lower opportunity cost than can its trading partner. Consider the production of shoes, for example. In the U.S., switching one worker into shoe production means gaining 250 pairs of shoes at a cost of 1,000 refrigerators. This is a ratio of four refrigerators given up for every one pair of shoes produced. In Mexico, the opportunity cost of producing 200 extra pairs of shoes, and taking labor away from refrigerator production, means reducing refrigerator production by 250 refrigerators. This is a ratio of 1.25 refrigerators given up for every pair of shoes produced. Measured in opportunity cost terms, it is cheaper to produce shoes in Mexico than in the United States, and so Mexico has a comparative advantage in the production of shoes. Can you tell me which country has comparative advantage in producing refrigerators and explain your answer?Explanation / Answer
Answer - On the basis of information given in above passage, we can say that USA has absolute advantage in production of both goods because US can produce more quantity of both good in absolute quantity.
In the US switching of one worker form producing 250 shoes cost 1000 refrigerator, the ratio is 1 pair shoes equal to 4 refrigerators. The opportunity cost of 1 pair shoes is 4 refrigerator and opportunity cost of 1 refrigerator is 250/1000 = 0.25 pair of shoes.
In Mexico, The opportunity cost of 1 pair of shoes is , 250/200 = 1.25 and
Opportunity cost of 1 refrigerator is 200/250 = 0.8
It is cheaper to produces refrigerator in United States. This is because the opportunity cost of one refrigerator is 0.25 of a pair of shoes in the United States. Whereas the opportunity cost of 1 refrigerator is 0.8 of a pair of shoes in Mexico. Therefore the United States has comparative advantage in the production of refrigerator.
If nation specialize in producing those goods for which they have comparative advantage, then efficiency in resource utilization increases. As a result total sum of the production among trading partners’ will be larger they will collectively have more goods and services to consumers.
Generally total surplus falls as a result of trade restriction.
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