Chapter 2, Problem 4P

To determine

One July, the U.S sold aircraft worth $1 billion to China and bought aircraft worth only $19,000 from China. During the same month, however, the U.S bought $83 million worth of men’s trousers, slacks, and jeans from China but sold only $8,000 worth of trousers, slacks, and jeans to China. Using what you have learned about how trade is determined by comparative advantage, answer the following questions.

(a)

Which country has a comparative advantage in aircraft production and in production of trousers, slacks and jeans?

(b)

Which country has an absolute advantage in aircraft production and in production of trousers, slacks and jeans?

Concept Introduction:

Opportunity Cost:

It is the cost of next best alternative activity. For example, A farmer can produce wheat, rice, and corn in his field and earns a profit of $100, $200 and $300 per month respectively. Then farmer will choose to grow corn in his field because he will get maximum profit by growing corn. So, the opportunity cost of growing corn will be $200 because the best alternative activity is growing rice because it will give him $200 per month.

Comparative Advantage:

When one country produces the good at lower opportunity cost than the other country, then the country that has produced the good at lower opportunity cost is said to have a comparative advantage in the production of that good.

Absolute Advantage:

It refers to the ability of a country to produce the same good with same resources at lower cost.