Unit 2 Assignment
Unit 2 Assignment
1. Explain the difference between absolute advantage and comparative advantage. Which is more important in determining trade between individuals or countries? Is it absolute advantage or comparative advantage? Why?
Absolute advantage is the ability to produce more than one product efficiently and at the lowest cost. Comparative advantage is the ability to specialize in producing one product at the lowest cost. Comparative advantage affects trade the most because with specializing in producing one product the companies must trade to receive other products. Comparative advantage also considers the opportunity of cost to produce one product verse the other.
2. Let us…show more content…
Country A’s Production Possibilities Frontier Country B’s Production Possibilities Frontier
A. Assume that country A and country B decide to use half of the resources in the production of each good. Indicate the points of the maximum output of each good on the graphs for each country as point A under such resource use.
Country A would produce 75 units of popcorn, and 125 units of peanuts, whereas Country B would produce 150 units of popcorn and 50 units of peanuts by reducing their resources in half.
B. Assume the two countries choose autarky and do not trade. What would be the total world production of popcorn and peanuts under the autarky?
The total popcorn production would be 225 units and the total peanuts would be 175 units.
C. Assume that each country decides to specialize in either popcorn or peanut based on its respective comparative advantage. Under the specialization, what is the total production of popcorn and peanuts?
With each country specializing in either peanuts or popcorn the world totals will be 300 units of popcorn and 250 units of peanuts.
D. Assume country A and B decide to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country receives from trade. Label these points on the two graphs “B.”
Country A would gain 100 units of popcorn while trading 100 units of peanuts which would leave them with 150 units of peanuts. Country B would also