Question

Suppose France can produce four phones or three computers with one unit of labor, and Sweden can produce one phone or two computers with one unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that__________.
a) France should specialize in producing phones and import computers from Sweden.
b) France should specialize in producing computers and import phones from Sweden.
c) France should produce both phones and computers and import nothing from Sweden.
d) France should import both phones and computers from Sweden

Answer 1

Answer:

Option (a) is correct.

Explanation:

France can produce four phones or three computers:

Opportunity cost of producing one phone = (3 ÷ 4)

                                                                      = 0.75 computers

Opportunity cost of producing one computer = (4 ÷ 3)

                                                                      = 1.33 phones

Sweden can produce one phone or two computers:

Opportunity cost of producing one phone = (2 ÷ 1)

                                                                      = 2 computers

Opportunity cost of producing one computer = (1 ÷ 2)

                                                                      = 0.5 phones

Therefore,

France has a comparative advantage in producing phones because of the lower opportunity cost of producing it than Sweden. France should specialize in producing phones and import computers from Sweden.

Sweden has a comparative advantage in producing computers because of the lower opportunity cost of producing it than France. Sweden should specialize in producing computers and import phones from France.