Chapter 20, Problem 1VQP

To determine

Identify the opportunity cost of production of each goods and comparative advantage of each country.

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.