When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than itstrading partner. Then the country will specialize in the production of this good and trade it for other goods.The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Desonia. Both countries produce grain and tea, each initially(i.e., before specialization and trade) producing 18 million pounds of grain and 9 million pounds of tea, as indicated by the grey stars marked with theletter A.MaldoniaDesonia484842423636PPF302418PPF1812129.121824303642480.6.12182430364248GRAIN (Millions of pounds)GRAIN (Millions of pounds)Maldonia has a comparative advantage in the production ofwhile Desonia has a comparative advantage in theproduction ofSuppose that Maldonia and Desonia specialize in the production of the goods in which each has aTEA (Millions of pounds)2430TEA (Millions of pounds) MaldoniaDesonia484842423636PPF30302418PPF181212A6.121824303642486.12182430364248GRAIN (Millions of pounds)GRAIN (Millions of pounds)Maldonia has a comparative advantage in the production ofwhile Desonia has a comparative advantage in theproduction ofSuppose that Maldonia and Desonia specialize in the production of the goods in which each has acomparative advantage. After specialization, the two countries can produce a total ofmillion pounds of grain andmillion pounds oftea.Suppose that Maldonia and Desonia agree to trade. Each country focuses its resources on producing only the good in which it has a comparativeadvantage. The countries decide to exchange 18 million pounds of grain for 18 million pounds of tea. This ratio of goods is known as the price oftrade between Maldonia and Desonia.TEA (Millions of pounds)24TEA (Millions of pounds)

Name: When a country has a comparative advantage in the production of a goo
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Description: When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than itstrading partner. Then the country will specialize in the production of this good and trade it for othe

The production possibility curve of each country shows the combination of two goods a country can…

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Maldonia Desonia 48 48 42 42 36 36 PPF 30 30 24 24 18 PPF 18 12 12 A. -- - --- -- 6 6. 12 18 24 30 36 42 48 6 12 18 24 30 36 42 48 GRAIN (Millions of pounds) GRAIN (Millions of pounds) Maldonia has a comparative advantage in the production of , while Desonia has a comparative advantage in the production of Suppose that Maldonia and Desonia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of grain and million pounds of tea. TEA (Millions of pounds) TEA (Millions of pounds)

Maldonia Desonia 48 48 42 42 36 36 PPF 30 30 24 24 18 PPF 18 12 12 A. -- - --- -- 6 6. 12 18 24 30 36 42 48 6 12 18 24 30 36 42 48 GRAIN (Millions of pounds) GRAIN (Millions of pounds) Maldonia has a comparative advantage in the production of , while Desonia has a comparative advantage in the production of Suppose that Maldonia and Desonia specialize in the production of the goods in which each has a comparative advantage. After specialization, the two countries can produce a total of million pounds of grain and million pounds of tea. TEA (Millions of pounds) TEA (Millions of pounds)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

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When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its
trading partner. Then the country will specialize in the production of this good and trade it for other goods.
The following graphs show the production possibilities frontiers (PPFS) for Maldonia and Desonia. Both countries produce grain and tea, each initially
(i.e., before specialization and trade) producing 18 million pounds of grain and 9 million pounds of tea, as indicated by the grey stars marked with the
letter A.
Maldonia
Desonia
48
48
42
42
36
36
PPF
30
24
18
PPF
18
12
12
9.
12
18
24
30
36
42
48
0.
6.
12
18
24
30
36
42
48
GRAIN (Millions of pounds)
GRAIN (Millions of pounds)
Maldonia has a comparative advantage in the production of
while Desonia has a comparative advantage in the
production of
Suppose that Maldonia and Desonia specialize in the production of the goods in which each has a
TEA (Millions of pounds)
24
30
TEA (Millions of pounds)

Maldonia
Desonia
48
48
42
42
36
36
PPF
30
30
24
18
PPF
18
12
12
A
6.
12
18
24
30
36
42
48
6.
12
18
24
30
36
42
48
GRAIN (Millions of pounds)
GRAIN (Millions of pounds)
Maldonia has a comparative advantage in the production of
while Desonia has a comparative advantage in the
production of
Suppose that Maldonia and Desonia specialize in the production of the goods in which each has a
comparative advantage. After specialization, the two countries can produce a total of
million pounds of grain and
million pounds of
tea.
Suppose that Maldonia and Desonia agree to trade. Each country focuses its resources on producing only the good in which it has a comparative
advantage. The countries decide to exchange 18 million pounds of grain for 18 million pounds of tea. This ratio of goods is known as the price of
trade between Maldonia and Desonia.
TEA (Millions of pounds)
24
TEA (Millions of pounds)

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