Macroeconomics: Economics and Absolute Advantage Essay

Submitted By buckojones691
Words: 846
Pages: 4

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Competitive Analysis and Business Cycles: BUS305

Introduction When a country has a comparative advantage over another, it means that even though the two countries are able to produce the same good or service, the one with the comparative advantage is able to produce it much better than the others. This usually goes hand in hand with the fact that the country with the comparative advantage, in order to produce superior goods, that they possess a lower opportunity cost. The reason a country is thus able to produce a more superior good means that there must be factors of production that enable it to so much cheaper.

Explain the Concepts of Comparative and Absolute Advantage
Suppose that USA and Canada are considering to trade. There are only two goods in the economy: potatoes and rice. From the table given USA can produce 8 units of potatoes and 4 units of rice in a given year. Canada can produce 10 units of potatoes and 16 units of rice per year. Which country should produce the potatoes? Absolute advantage occurs when a county is able to produce goods in much larger quantities than any other country. Within absolute advantage, the aspect of opportunity cost is not factored in, meaning that if Canada is able to produce more goods than USA albeit doing so at a much higher cost, it still has absolute advantage over USA. Which country should produce the potatoes?
For USA:
8 units of potatoes = 4 units of rice
In order to compare opportunity costs across goods, it is easier to compare the goods in units of one. Therefore:
8 potato = 4 rice (divide both by 2 in order to solve for 1 unit of potato)
8/2 potato = 4/2 rice
4 potato = 2 rice
4 potato = 2 rice
1 potato = 1/2 rice
The opportunity cost per rice is 1 unit of potato.
For Canada:
10 units of potatoes = 16 units of rice
In order to compare opportunity costs across goods, it is easier to compare the goods in units of one. Therefore:
10 potato = 16 rice (divide both by 2 in order to solve for 1 unit of potato)
10/2 potato = 16/2 rice
5 potato = 8 rice
5 potato = 8 rice
2.5 potato = 4 rice
The opportunity cost per rice is 2.5 units of potato.
I have concluded that USA should produce the potatoes due to the opportunity costs involved.

How Does Trade Affect the Production Possibilities Frontier? Among others, factors such as labor, capital and technology will affect where the production possibility frontier lies. The PPF is also known as the production possibility or transformation curve. (Investopedia 2012). When all inputs are used effectively,(resources and labor), then maximum output possibilities will be obtained. Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

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