Country A produces 10 chairs and 6 tables using its resources. Country B produces 12 chairs and 18 tables. Determine the comparative advantage and the absolute advantage that both countries enjoy
What will be an ideal response?
The opportunity costs of producing each good in the two countries are shown below.
Opportunity cost of producing a chair in Country A = 0.6 tables.
Opportunity cost of producing a chair in Country B = 1.5 tables.
Hence, Country A has a comparative advantage in producing chairs.
Opportunity cost of producing a table in Country A = 1.67 chairs.
Opportunity cost of producing a table in Country B = 0.67 chairs.
Hence, Country B has a comparative advantage in the production of tables.
Because the opportunity cost of producing tables is less in Country B, Country B has a comparative advantage in the production of tables. On the other hand, Country A has a comparative advantage in producing chairs.
Country B can produce more of both the goods than Country A; therefore, it enjoys an absolute advantage in the production of both goods.
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