Question

"(Absolute and Comparative Advantage) You have the following information concerning the production of wheat and cloth in the United States and the United Kingdom: Labor Hours Required to Produce One Unit A.The United Kingdom The United States Wheat 2 1 Cloth 6 5 What is the opportunity cost of producing a unit of wheat in the United Kingdom? In the United States? Which country has an absolute advantage in producing wheat? In producing cloth? Which country has a comparative advantage in producing wheat? In producing cloth? Which country should specialize in producing wheat? In producing cloth?"

Answer 1

Answer:

• opportunity cost is the best alternative forgone when an item or activity is chosen, otherwise thought of as opportunity lost.

The opportunity cost of producing a unit of wheat in the United Kingdom is one third to the production of cloth. In the case of taking one hour to produce one unit of wheat or six hours to produce one unit of cloth, the opportunity the production of three units of wheat to one unit of cloth. The opportunity cost of producing a unit of wheat in the United States is one fifth the production of cloth. By the same standards, producing one unit of wheat occurs faster than producing one unit of cloth and yields five units of wheat to one unit of cloth.

• Absolute advantage is the ability to make something using fewer resources than other producers use.

In this case, the United States has the absolute advantage producing wheat because they can produce one unit in one hour and therefore can produce twice as much as the United Kingdom. Although not by much, the United States also has the absolute advantage in producing cloth because they can produce one unit of cloth in 5 hours while it takes the United Kingdom an additional hour to produce the same outcome.

• Comparative advantage is the ability to make something at a lower opportunity cost than other producers face.

The United States has the comparative advantage in producing wheat as the opportunity cost is one fifth of a unit of cloth which is less than the one third of cloth the United Kingdom can produce. The United Kingdom has the comparative advantage in production of cloth with three units of wheat to the United States cost of five units of wheat giving United Kingdom a lower opportunity cost.

• The law of comparative advantage states that the individual with the lower opportunity cost of producing a particular output should specialize in that output. Therefore, the United States should specialize in producting wheat because they can produce twice as much wheat in the same amount of time, while the United Kingdom should specialize in cloth because although they are not quite as fast as the United States, they will still produce nearly the same amount as the United States while they are producing wheat and something is better than nothing.