About comparative advantage

Comparative advantage is characterized as an economic agent’s ability to manufacture services or products at a lower opportunity cost than competitors. It should be remembered that comparative advantage does not take into account the quantity of products made. The opportunity cost is the difference between the value of a good and the value of the other best option that is foregone. Absolute advantage, on the other hand, is an economic principle that corresponds to a commercial actor’s capacity to deliver a greater quantity of services and commodities than other economic actors (Kolmar, 2017).

The most basic economic theory used to assess trade between countries and individuals is comparative advantage. The competitive advantage is superior to absolute advantage since it can be used to find the gains from trade even when the absolute reciprocal advantage does not exist (Laursen, 2015).

Question Two

Part A

Using all their resources, Larry can use 10 hours to prepare slides and 10 hours for calculations. On the other hand, Kate can

Larry

Kate

Calculation

10 hours

12 hours

PowerPoint slides

10 hours

20 hours

To find out how long it takes for both Kate and Larry to complete the task, we apply the concept of finding the midpoint of the straight line. The midpoint of a line is obtained using the formula,

Therefore,

Larry

Kate

The above information may be represented in a table format as shown below,

Larry and Kate

Calculation

(5 + 6) = 11 hours

PowerPoint slides

(10 + 5) = 15 hours

Thus, Larry and Kate will spend 11 hours on calculation and 15 hours on PowerPoint slides. In total, they would spend 26 hours if they divided the tasks equally.

Part B

In this case, Larry has a comparative advantage in preparing the PowerPoint slides and in the calculation. This is because he is 0.83 better in preparing the calculations than Kate. Besides, he is also 0.5 better in developing the slides than Kate.

The most significant advantage of Larry lies with the preparation of PowerPoint slides. In this regard, Larry should specialize in slides leaving Kate to specialize on preparing calculations. Therefore, the time taken by the two students after specializing is (10hr + 12hr) = 22hrs.

Part C

The following table depicts the opportunity cost in hours of both Larry and Kate in calculating and preparing slides.

Calculation

Slides

Opportunity Cost

Calculating

Preparation of slides

Larry

10

10

1

1

Kate

12

20

1.67

0.60

Apparently, Larry loses $5 while Kate loses $8.35 when working independently. This implies that they will lose a total of $13.5 before specialization. However, they both lose $8 since Larry loses $5 and Kate loses $3 when specializing in preparing the slides and calculations respectively. Therefore, it is essential for the two students to specialize because it is less costly than when working independently.

Question Three

Part A

The point of maximum output when the countries allocates half of its resources to produce each good is calculated below,

Country A

Country B

Part B

Under autarky, the countries do not trade, and therefore, they produce and consume both the two goods. In this case, the world output produced would be given by,

Part C

When both countries use all their resources, country A produces 150 unit of popcorns and 250 units of peanuts whereas country B produces 300 unit of popcorns and 150 units of peanuts. Therefore, country A has a competitive advantage in the producing peanuts since it is 2.5 times better than country B. On the other hand, country B is 2 times better in producing popcorns than country A. In this regard, country B will specialize in the production of peanuts while country A will specialize in producing popcorns.

The total output under specialization is given by,

Country A = 400x + 0y

Country B = 0x + 400y

Therefore, combining the outputs of the two countries above we have,

400 + 400 = 800 units

Part D

When specializing, country A produces 400 peanuts and zero popcorn. However, due to the international trade brought about by comparative advantage, country A receives 100 units of popcorn from country B. Country A will, in turn give out 100 units of peanuts to country B.

Country A

Before specialization, the output of country A was,

Country’s A output = 250x + 150y = 400 units

After specialization and trading, the output of country A now becomes,

New country’s A output = 400x + 100y = 500 units

Country B

It should be noted that before specialization process, the output of country B was,

Country’s B output = 100x + 400y = 400 units

After specialization and trading, the output of country B now becomes,

New country’s B output = 100x + 400y = 500 units

References

Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.

Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization. Eurasian Business Review, 5(1), 99-115.

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