Standard Question Which country has Absolute Advantage i n producing bread (or car) ?

1. Standard Question Which country hasAbsolute Advantage in producing bread (or car)? Which country hasComparative Advantage in producing bread (or car)? How can we get the opportunity cost? =>go to the next page Opportunity Cost A’s O.C. for bread in terms of car: ¼ car B’s O.C. for bread in terms of car: 1/6 car Absolute Advantage: 12<24 implies that Country B has absolute advantage on bread. 3<4 implies that country B has absolute advantage on car, too Comparative Advantage Country B has comparative advantage on bread. Then automatically Country A has comparative advantage on car.

2. Standard Question Which country has Comparative Advantage in producing bread (car)? Start from Opportunity Cost !! The inequalities are always crossing. Why? Professor’s Tip (opportunity cost) A’s opportunity cost for bread in terms of car: 12 X bread = 3 X car => bread = ¼ car B’s opportunity cost for bread in terms of car: 24 X bread = 4 X car => bread=1/6 car So, Country B has comparative advantage on bread and Country A has comparative advantage on car.

3. Confusing Trick I (frequently used in Exam) Which country hasAbsolute Advantage in producing bread (car)? Which country hasComparative Advantage in producing bread (car)? • What’s the difference ? • the figure in the Input table : the quantity needed to produce 1 unit of output • the figure in the Output table : the quantity produced by 1 unit of input • Check first what figures mean !! • To get the output table from the input table, take the reciprocal of each figure.

4. Confusing Trick I (frequently used in Exam) • the figure in the Input table : the quantity needed to produce 1 unit of output • the figure in the Output table : the quantity produced by 1 unit of input • Check first what figures mean !! In order to produce 1 unit of bread, A needs 12 workers. In order to produce 1 unit of car, A needs 3 workers. So, In order to produce 1 unit of bread, it should give up 4 units of car. By the same reasoning in order to produce 1 unit of car, it should give up ¼ unit of bread. With 1 unit of workers, A can produce 12 units of bread. With 1 unit of workers, A can produce 3 units of car. So, In order to produce 1 unit of bread, it should give up ¼ units of car. By the same reasoning in order to produce 1 unit of car, it should give up 4 units of bread.

5. Confusing Trick II (frequently used in Exam) Which country hasAbsolute Advantage in producing bread (car)? Which country hasComparative Advantage in producing bread (car)? What’s the difference ?=> the table is transposed. TA’s advice In both tricky questions (Trick I & II), you may solve them without converting the table if you are very very smart. But you might be confused in exam situation. So I strongly recommend that you convert the table to the output table first. Additionally, no matter which way you prefer, you should check what figures mean first!! (input or output)

6. Quantity of Bread Produced Quantity of Cars Produced Application I 100 20 Assuming that both country have same workers. 80 50 • Application II (true or false) • Generally, it is possible for one country to have absolute advantage on both goods • Generally, it is possible for one country to have comparative advantage on both goods. • If the rich country has absolute advantage on both goods, then it doesn’t have to trade with the other poor country. • We can say that Trade always make both country be better off. • What isthe opportunity cost ofproducing one more car for each country ? • Present the table. • Determine which country specializes in cars (or computers). • How many cars are produced in these two countries? • Is it possible that both countries gain from trade?Explain.