Compared to what has to be sacrificed, Brazil produces computers for only two-thirds as much as it costs in the United States. 3. stream consume outside its production possibility frontier. (Figure: Guns and Butter) If the economy were operating at point B, producing 16 units of guns and 12 units of butter per period, a decision to move to point E and produce 18 units of butter: involves a loss of 8 units of guns per period. The economy's factors of production are not equally suitable for producing different types of goods. (Table: Coffee and Salmon Production Possibilities II) This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. The United States, of course, has a comparative advantage over Brazil in the production of cars. Coffee took an essential part of the Brazilian history. Suppose Ireland exports beer to China and imports pineapples from the United States. To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see ). If Brazil has a comparative advantage in the production of coffee compared to the United States, then A) Brazil can produce coffee at a lower opportunity cost than the United States. The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.. Country B has comparative advantage in good X. c. Country A has comparative advantage in good X. Suppose Brazil has a comparative advantage over other countries in producing almonds, but other countries have an absolute advantage over Brazil in producing almonds. (Figure: Guns and Butter) This production possibility frontier is: bowed out from the origin because of increasing opportunity costs. shift the production possibility frontier outward. b. will export almonds. Canada has an absolute advantage in both steel and wheat. A country has the comparative advantage of producing a good if the opportunity cost of producing that good is lower in that country than it is in another country. To simplify, let’s say that Saudi Arabia and the United States each have 100 worker hours (see ). Brazil has: a. a comparative advantage in producing coffee only. In , Saudi Arabia has an absolute advantage in producing oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States.The United States has an absolute advantage in producing corn. 2 0 obj Brazil has to give up 12 (E) Brazil has a comparative advantage units of coffee vs. Peru's 6 producing wheat. If each country now specializes in one producing good then assuming constant returns to scale, the output will double. c. Austria has an absolute advantage in steel. There is only one resource available in both countries, labor hours. endobj These goods are homogeneous, meaning that consumers/producers cannot differentiate between corn or oil from either country. If one country has a comparative advantage over another, both parties can benefit from trading because each party will receive a good at a price that is lower than its own opportunity cost of producing that good. 1 0 obj �P���*����T���7�+q{�wo��>����E���nV���}\_4��o�x������_��n�o������Y�y�HO'�,��}䧕p��ﮄp,������פI�墬�d�e�3"�4?������w���E�z\W�;�د�ZѭN\���j�[��͜�M`>QG��/~ endobj The two flows represented in the circular-flow diagram are: the flow of money and the flow of goods and services. Question: Using The Numbers In The Table, Determine Which Country Has A Comparative Advantage In Producing Each Product. The benefits of buying its good or service outweigh the disadvantages. Neither Chile nor Brazil has a comparative advantage in producing coffee. Consider a possible production possibility frontier for Iraq. Which of the following is a normative statement? Technological Change and Trade in Biofuels The U.S. Energy Independence and Security Act of 2007 requires that by 2022, almost 50 percent of the mandated use of renewable fuels be met by second-generation biofuels such as cellulosic ethanol. <> America's comparative advantage. B Diff: 2 Topic: The Economic Basis for Trade: Comparative Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-8 23. The circular-flow diagram illustrates how households ________ goods and services and ________ factors of production. d. a comparative advantage in producing neither coffee nor salmon e. an absolute advantage in producing neither coffee nor salmon ____ 15. If the production possibility frontier were a straight line sloping down from left to right, this would suggest that: the opportunity costs of the products are constant. In Brazil, a day of labor produces either 2 units of coffee or 1 unit of sugar. <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> If Brazil devoted all of its resources to producing wheat, it would be producing at point A. Argentina has a comparative advantage in wine: – Argentina’s opp. Comparative Advantage: A country enjoys a comparative advantage in the production of a good or a service if it can produce it at a lower opportunity cost as compared to its counterpart nations. If Brazil increases production of ethanol from 40 barrels per day to 54 barrels per day, the opportunity cost … e. All of the above. Which of the following statements is true? Further assume that consumers in both countries desire both these goods. Producing 100 cars here costs 666 computers, while producing 100 cars in Brazil costs 1,000 computers. endobj The table here, unlike those above, shows labor productivities, i.e., outputs per worker. In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. Which country has a comparative advantage in producing ethanol?Expl The United States, of course, has a comparative advantage over Brazil in the production of cars. When moving along a production possibility frontier, the opportunity cost to society of getting more of one good: is measured by the amount of the other good that must be given up. (Table: Coffee and Salmon Production Possibilities II) This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Question 4 Suppose Brazil has an absolute advantage over other countries in producing almonds, but other countries have a comparative advantage over Brazil in producing almonds. Comparative Advantage • A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries. Compared to what has to be sacrificed, Brazil produces computers for only two-thirds as much as it costs in the United States. Statement I reflects a normative view. Strictly speaking, these constitute economic rents rather than comparative advantage — but they still have it and most other countries do not. (Scenario: Countries A and B) If Country B specializes in steel and produces 300 units of steel, how much wheat can it produce? {k׉ͺ^���(!���\��� ���f����@�>� � �\�P�z |D�ݗ a �.���{������}¡����j|������B�$Z�M��XT8��J�2�-��{�ТJ�:����X��T��Xy:Qvp-�!`k�;��Z֫~�(V]��x�P$-R/p���p��b8��O���0�E���n+����-����j{�@�r��Y{߻ Oܡ�=Q||6rsġ-Y4��=�U���A�x���VЧ�v��_��t�3\���5>�E��[޼H�'V������������`��l��K�Н���o��q�J�8#�� 19#5�ƙ��O��3�a�iպ4�����04��}+�����2�omam�������%Q�JʧԒi 6�jY�w+�j�西�Ť���e���7���3�Lm��;�$YB� �2�_e��CF�\='7� p��&tg�'��\�fN\��ڄd�j���������ao��Í��ѹ�pm��v�{������9� ���)b@f�0��a�o�� �Z����m��5V��&���mE�܏L��\�s@$���Ҏ�=��`�1w�I��h��A�bD�ݎ��F�Sۏ��O�Lw'��`+q1Xɜ!K�Z%r�YH���.��j��Ӏ����Lm$�*��֊MW��@nB�G�?hG��1��4���}pidRK�YTi�K���C�`�܆�J%Y��8%x��5L�Nh��,BRh��;�����3�C^�ݏ n�3�=n(3s�l�2���xf�'�T���U-���!��2 Country A has comparative advantage in good X. b. b. a comparative advantage in producing salmon only. Answer: Brazil has an absolute advantage in coffee: – Producing a pound of coffee requires only one labor-hour in Brazil, but two in Argentina. d. Belgium has an absolute advantage in brooms. includes Brazil, has a comparative advantage in producing biofuels that are land-intensive in production). (Table: Coffee and Salmon Production Possibilities II) This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. The market for goods and services and the market for factors. Which are the two markets represented in the circular-flow diagram? Saudi Arabia can produce oil with fewer resources, while t… Refer to Scenario 20.1. �p�8��b��ZQH�T���7|!W��f��΁;�@CieZ����u\�������r��a�n����#&�ٶ?1i�\J}��@c�>�`�m,� Of the following statements, which reflect(s) a normative view? For Brazil, export gains could be made in minerals, animals, food products, hides and skins, metals and raw materials such as alloys and iron ores, all sectors where Brazil has a high revealed comparative advantage compared to the United States. Output Per Hour Of Work Smartphones Fitness Bracelets 9 12 6 5 Switzerland Canada Which Of The Following Statements Is True? Winter Term 2014 Comparative Advantage Study Questions (with Answers) Page 5 of 6 (8) a. (Scenario: Countries A and B) If Countries A and B both specialize and trade: Country A and Country B will gain if they specialize in their comparatively advantaged good. (Scenario: Countries A and B) Given this information, Country ________ has a comparative advantage in the production of wheat and Country ________ has a comparative advantage in the production of steel. One should be especially wary of the national-security argument for restricting trade when that argument is made by <>>> b. Austria has a comparative advantage in steel. Opportunity cost measures a trade-off. (O) Peru has a comparative advantage in producing wheat. Suppose that Brazil has a comparative advantage in coffee and Mexico has a comparative advantage in tomatoes. %PDF-1.5 The Opportunity Cost For Switzerland To Produce One Smartphone Is 0.75 Fitness Bracelet, B. The production possibility frontier illustrates that: if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. For example, Brazil enjoys a comparative advantage over the United States in coffee (we don’t produce it except some specialty in Hawaii). cost of wine is two pounds of coffee, because the four labor-hours required to produce a bottle of wine could instead produce two pounds … Ans: e 6. From the North of Brazil, the coffee fields started to spread along the country, concentrating in the areas along the shore. I. Even if one country has an absolute advantage in producing all goods, different countries could still have different comparative advantages. A nation with a comparative advantage makes the trade-off worth it. If trade in almonds is allowed, Brazil a. will either import almonds or export almonds, but it is not clear from the given information. The circular-flow diagram illustrates how firms ________ goods and services and ________ factors of production. b. We would all be better off if we could reduce our dependence on oil imports. The Concept of Comparative Advantage Active Learning 4 Absolute and Comparative Advantage Answers: Brazil has an absolute advantage in coffee: – Producing a pound of coffee requires only one labor-hour in Brazil, but two in Argentina. c. will import almonds. Brazil has a comparative advantage in producing: Economists usually make the assumption that production is subject to increasing opportunity costs because: all resources are not equally suited to producing every good. (A) Peru has a comparative advantage in coffee. At present, 50 percent of U.S. imported coffee comes from countries we have an FTA with including Colombia and Guatemala, so Brazil would be well poised to increase its share of U.S. coffee imports under an FTA. (Figure: Guns and Butter) On this figure, points A, B, E, and F: indicate combinations of guns and butter that society can produce using all of its factors efficiently. cost of wine is two pounds of coffee, because the four labor-hours required to produce a bottle of wine could instead produce two pounds of coffee. Brazil has vast mineral and raw material wealth, particularly iron ore but also oil and other minerals. Consider a hypothetical world with two countries, Saudi Arabia and the United States, and two products, oil and corn. (C) Brazil has an absolute advantage in producing wheat. <> Argentina has a comparative advantage in wine: – Argentina’s opp. O A. B) Brazil also has an absolute advantage in the production of … 4 0 obj As it turns out, America's manufacturing sector -far from withering in the face of foreign competition - is actually thriving. The plant, originally from Etiopia, was first brought to Brazil by some French settlers who established in the state of Pará in the early 18th century. %���� (Table: Production Possibilities Schedule II) The production of 14 units of consumer goods and 1 unit of capital goods per period would: (Table: Production Possibilities Schedule II) If the economy is producing at alternative X, the opportunity cost of producing at Y instead of X is ________ units of consumer goods per period. If Brazil increases production of food crops from 2 tons per day to 3 tons per day, the opportunity cost of the additional ton of food crops is 14 barrels of ethanol. Alaska has an absolute advantage in producing. The U.S. needs to increase the minimum wage to $10 per hour. In , Saudi Arabia has an absolute advantage in producing oil because it only takes an hour to produce a barrel of oil compared to two hours in the United States.The United States has an absolute advantage in producing corn. Suppose Brazil has a comparative advantage over other countries in producing almonds, but other countries have an absolute advantage over Brazil in producing almonds. In our example, Brazil has a comparative advantage in sugar cane and the U.S. has a comparative advantage in wheat. c. an absolute advantage in producing both coffee and salmon. a. Brazil has a comparative advantage in producing coffee. 3 0 obj producing (B) Peru has an absolute advantage in producing wheat. Then Brazil has a a. Brazil has the absolute advantage in producing beef and the United States has the absolute advantage in autos. One can easily see this with a simple observation of the extreme production points in the PPFs of the two countries. A simplified representation that is used to study a real situation is called: The importance of an economic model is that it allows us to: focus on the effects of only one change at a time. Solution Paper for Which country has a comparative advantage in producing ethanol? India has now become the international leader in providing these goods and services to the big powers especially the U.S., because it can produce them cheaply because of its abundance of low cost labor. x��[mo�8� ����FE�.� mv����^[܇�pPl%�Jn��~��I�4�h����Z�9�f��Ù�X���x��Ż������R���J��p~��)d�4��ps~&E (Scenario: Countries A and B) If each country devotes half of its resources towards the production of wheat, and half towards the production of steel, then their total production of wheat would be ________and their total production of steel would be ________. Brazilians have a comparative advantage. Suppose that Australia and Brazil have the outputs per worker in producing sleds and clarinets shown in the table at the right. If trade in almonds is allowed, Brazil d Mexico will export oranges. Comparative advantage is when a country produces a good or service for a lower opportunity cost than other countries. ٔi�B"�`B$�E!��4���1��]�v(T7��(zr�o�5�t6T���K���T��������Vg����=;!=�X���Q��!u�=I`� ~{t��;]�f����A�ܘ{Gƙ%�9h;Y��%���,�`�Q���4�%Ƴ�L��4%[L. Russia has a comparative advantage over Ireland in producing sunflower seeds, and Brazil has a comparative advantage over Russia in producing coffee. The opportunity cost of producing one pound of beef is 1/10 of … This principle generates: (Figure: Consumer and Capital Goods) The movement from Curve 1 to Curve 2 indicates: (Figure: Consumer and Capital Goods) Point Z: is unattainable, all other things unchanged. If in 2008 Iraq's resources are not being fully utilized, Iraq will be somewhere ________ of its production possibility frontier. Includes Brazil, a day of labor produces either 2 units of coffee vs. Peru 's 6 wheat... Following Statements is True oil and corn needs to increase the minimum wage to $ 10 per.... 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