Absolute Advantage in Production of Hamburgers
Given that,
|
Hamburger |
T-shirts |
|
|
Mike |
10 |
3 |
|
Johnson |
7 |
4 |
Figure 1: PPC of Mike
Source: (Created by Author)
b) According the concept of absolute advantage, if a producer is engaged in production of two commodities and specializes in production of only one product, then that producer is said to have absolute advantage in production of that goods that he can produce at lower cost compared to its rival (Feenstra 2015).
Considering the given data, it can be said that Mike has absolute advantage in production of hamburgers, because he can produce 3 more hamburgers compared to Johnson.
On the other hand, Johnson has absolute advantage in production of T-shirts, because he can produce 4 T-shirts utilizing all of his working hours compared to 3 T-shirts of Mike.
c) Opportunity cost is the benefit, which is foregone in order to perform another action. According to the given question, there are two players, who are Mike and Johnson (Lewis 2015). There opportunity cost is as follows:
In order to produce 3 T-shirts, 10 hamburgers has to be foregone by mike.
Thus, opportunity cost of Mike for T-shirts is: 10/3 = 3.33
On the other hand, for producing 4 T-shirts, Johnson has to foregone 7hamburgers.
Thus, opportunity cost of Johnson for T-shirts is: 7/4 = 1.75
From the above calculation, it can be seen that opportunity cost for producing T-shirts is higher in the case of Mike.
d) Comparative advantage is the ability of a producer to produce goods and services more efficiently compared to other activities (Gopinath, Helpman and Rogoff 2014).
According to the question, opportunity cost of producing hamburgers for Mike and Johnson is as follows:
Mike – 3/10 because he has to foregone 3 T-shirts for producing 10 units of hamburgers
Johnson – 4/7 as, Johnson have to foregone 4 units of T-shirts for 7 units of hamburgers.
From the analysis, it can be envisaged that, Mike has comparative advantage for producing hamburgers.
a) Autarky equilibrium price ratio for H: Px/Py= 450/200 = 2.25
Autarky equilibrium price ratio for F: Px/Py= 400/200 = 2.00
b) Range of feasible equilibrium world price ratios: (Px/Py) F< (Px/Py) W< (Px/Py) H
Therefore, world price ratio will lie between: 2.00< (Px/Py) W<2.25
c) Country H will export X because it has comparative advantage in production of good X.
d) Real return to labour equalize in home market because wage rate equates with MPL.
a) With rise in capital in the home market, PPF will shift rightward from the side of good 1, because home country produces only good 1. Rise in capital will not affect the production of foreign country, thus the PPF will not shift horizontally rightward.
b) If the countries open up for trade, then they home country will export good 1 to the foreign country owing to its competitive advantage in production of good 1. Besides this, the foreign country will export good 2.
c) If the countries open up trade, then, labours will shift from foreign country to home country because, home country has comparative advantage in production of good 1, which is labour intensive in nature. And following the same trend capital will flow to the foreign country because it produces capital intensive product. Opening of trade will not affect the land.
Pre-trade and free trade relative prices are identical
More, lower, immobile
Restriction on Imports are intended to benefit domestic consumers.
A curved line, diminishing marginal returns
5) Can be significant in the short run
Reference:
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.
Gopinath, G., Helpman, E. and Rogoff, K. eds., 2014. Handbook of international economics (Vol. 4). Elsevier.
Lewis, W.A., 2015. The evolution of the international economic order. Princeton University Press.
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