Does having an absolute advantage means you should undertake to produce everythi
ID: 2441072 • Letter: D
Question
Does having an absolute advantage means you should undertake to produce everything your country could produce? Also, does this mean that absolute advantage means more than comparative advantage? If so, why? If not, why not? Now suppose that automobile workers in South Korea can produce components to make cars at the rate of six sets of components per worker per day and can assemble cars at a rate of four cars per worker per day. In North Korea, automobile workers can produce components at the rate of one set of components per day and can assemble cars at the rate of three cars per day per worker. Which economy has the absolute advantage? Which one has the edge in terms of a comparative advantage? Who should trade with whom and why? Would it be better for North or South Korea to outsource parts production? If so, why or why not? Finally, how might the foreign exchange rate on the international FOREX markets play a part in terms of the North Korean Won, the South Korean Won, and production (and potential trade) considerations in this case? Please be specific.
Explanation / Answer
No if a country could have absolute advantage in the production but it may not have the comparative advantage. If the country has not the comparative advantage then it's opportunity cost of production compare to other is more. If it has has the absolute advantage it could not undertake to produce everything the country could produce.
No, absolute advantage is not more important than comparative advantage. Comparative advantage is the comparison based on the opportunity cost of production of a nation and absolute advantage based on the difference in absolute cost of production. Opportunity cost gives the real cost of production of one thing. So it will never mean that absolute advantage more than comparative advantage.
Now according to given condition of production of components of car and assembling of car in two countries North Korea and South Korea we can form this table.
According to above scenario South Korea has the absolute advantage in both i.e producing car components and assembling car components.
In terms of comparative advantage South Korea has the comparative advantage in the production of car components because it sacrifice less amount of car assembling (4/6=0.66) than North Korea (3/1=3). North Korea has the comparative advantage in Car assembling because it has the less opportunity cost of car assembling (1/3=0.33) than South Korea(6/4=1.50).
In terms of comparative advantage both should trade with each other. South Korea will trade with North Korea and vice versa. Because South Korea has the comparative advantage in production of car components and North Korea has the advantage of production of car assembling. South Korea will export Car components and import assembling car and on the other hand North Korea will export assembling car and import car components.
It is better for South Korea to outsource a parts of production of it outsource car assembling from North Korea then South Korea will gain from here.
Country/Production Car components Car assembling South Korea 6 (per worker per day) 4 (per worker per day) North Korea 1(per worker per day) 3(per worker per day)Related Questions
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