Macroeconomics (Book Only)
12th Edition
ISBN: 9781285738314
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 22, Problem 1VQP
To determine
Identify the
Expert Solution & Answer
Explanation of Solution
The production of countries A and B is shown in the table below:
Table 1
| Country | Commodity X | Commodity Y | |
| A | 10 | 20 |
1X= 2Y 1Y= .5X |
| B | 30 | 40 |
1X= 1.33Y 1Y= .75X |
According to the table, Country A requires less labor hour for both X and Y. 1 unit of X is produced with the help of 10 labor hour. As given above, 30 labor hours are required in Country B. in the case of commodity Y Country A requires 20 hours and country B requires 40 hours. Country A requires less labor hours to produce Y than B. According to the theory of comparative advantage, Country A has advantage in both goods. But it makes trade on Commodity X because it has maximum advantage on Commodity X and Country B also makes trade on Commodity X because it has minimum disadvantage in commodity.
Economics Concept Introduction
Comparative advantage: Country can go with trade with a good, which has the highest comparative advantage or lowest comparative disadvantage (lowest opportunity cost).
Opportunity cost: Opportunity cost is a loss of a good opportunity when the other one is chosen.
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