Question

Suppose labor productivity differences are the only determinants of comparative advantage, and Brazil and Chile both produce only coffee and sugar. In Chile, either 5 units of coffee or 2 units of sugar can be produced in one day. In Brazil, a day of labor produces either 2 units of coffee or 1 unit of sugar.
Refer to Scenario 34-1. Which country has a comparative advantage in producing sugar?

Select one:

a. Brazil only
b. Chile only
c. Both countries
d. Neither country
e. It cannot be determined with the information given.

Answer 1

Answer:

The correct answer is letter "A": Brazil only.

Explanation:

Comparative advantage is the ability of an organization or individual to produce at lower opportunity costs. This is achieved by introducing efficient productivity strategies or achieving economies of scale.

For the case given, the comparative advantage of Brazil and Chile is based on labor productivity only. Then:

• The comparative advantage of Chile on sugar = $\frac{2 units of sugar}{5 units of coffee}$ = 0.4
• The comparative advantage of Brazil on sugar = $\frac{1 unit of sugar}{2 units of coffee}$ = 0.5

Thus, Brazil has a comparative advantage over Chile on sugar.