Question 1: Assume there are two nations: Panama and Guatemala that produce two commodities: coconuts and passion fruits. The table below contains the amount of each commodity produced per hour of labour in the two nations in terms of Kg. Panama Guatemala Passion fruits 9. 4 Coconuts 6. 5 a) What is the opportunity cost of passion fruits in the two countries? How does it differ from relative price? b) What is the principle of comparative advantage? Which country has comparative advantage in passion fruits?

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Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.