Answer:
- <em><u> Spain </u></em><em> has a comparative advantage in the production of wine.</em>
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- <em><u> Hungary </u></em><em> has a comparative advantage in the production of cheese.</em>
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Explanation:
To compare the advantages of two countries to produce two goods, like <em>Hungary </em>and <em>Spain</em> both producing <em>cheese</em> and <em>wine</em>, you should use the comparative cost advantages.
The comparative cost advantage tells which country has a greater comparative advange than the other by comparing the ratio of the opportunity cost.
Hungary can produce 3 pounds of cheese when it produces a bottle of wine. Hence its opportunity cost ratio is:
- 3 lb of cheese / 1 bottle of wine, or
- 1 bottle of wine / 3 lb of cheese = 0.33 bottle of wine / 1 lb of cheese.
Spain can produce 2 pounds of cheese when produce a bottle of wine. Hence its opportunity cost ratio is:
- 2 lb of cheese / 2 bottle of wine = 1 lb of cheese / 1 bottle of wine, or
- 1 bottle of wine / 1 lb of cheese
<u>Comparative advantage to produce wine:</u>
To find which country has the comparative advantage in the prouction of wine compare: to Hungary, 1 bottle of wine costs 3 lb of cheese, while to Spain 1 bottle of wine costs 1 lb of cheese. Hence, since the opportunity cost of producing wine in terms of the production of cheese is lower for Spain, Spain has a comparative advantage in the production of wine.
<u>Comparative advantage to produce cheese:</u>
The opposite is true for the production of cheese. Since 3 lb of cheese cost 1 bottle of wine to Hungary, while 1 lb of cheese cost the 1 bottle, the opportunity cost of producing cheese in terms of the production of wine is lower for Hungary, Hungary has a comparative advantage in the production of cheese.