In which good does Canada have an absolute advantage vs a comparative advantage? Easy microecon question??
Canada makes 20 beer and 40 milk while U.S.A. makes 80 beer and 120 milk. In which good if any does Canada have an absolute advantage and which good does Canada have an comparative advantage? And what is Canada's opportunity cost of beer?, for every beer, only 2 milk?
More Questions From This User See All
Answers & Comments
Verified answer
This problem is missing the statement that the same amount of labor and an equal value of other inputs can produce either the beer or the milk in that country. If you assume that, then you can solve for comparative advantage by pricing one good in terms of the other. take the number of milks they can produce and divide by the number of beers to get the price of one beer in terms of milk. 40 milks /20 beers = 2 milks per beer just flip the faction upside down to get the other price. 20/40 = 1/2 beers per milk
In canada, 1 beer costs 2 milk and 1 milk costs 1/2 a beer
In the US, 1 beer costs 1.5 milk and 1 milk costs 2/3 of a beer
So canada has a comparative advantage in milk, they are better at producing milk than they are beer. The US has the comparative advantage in beer, spending only 1.5 milks to make a beer vs the 2 milks it costs canada to make beer. So the us and canada can trade beer for milk and both be better off.
To determine absolute advantage we also have to assume that the production levels cited are using the same amount of labor in each country and the same value in other inputs.
If we assume that, we can see that the US has the absolute advantage in both goods, but would still trade with canada for Milk because it costs less to trade for milk than to make it themselves
You know what? I'm going to go with "you can't tell from this question". Maybe Canada makes twice as many milk as beer, but that does NOT mean that the opportunity cost of a beer is 2 milk.
Think about it. If I have 100 units of water and a bunch of tabasco sauce, I could make 100 units of either tabasco-flavored water or normal water. If I sell 99 units of regular water and 1 unit of tabasco-flabored water, that does not mean the opportunity cost of tabasco-flavored water is 99 units of normal water. It just means that hardly anyone wants to buy tabasco-flavored water.
Also, Canada produces comparatively more milk than beer when compared to the US (they make 1/4 as much beer as the US vs 1/3 as much milk as the US). But that does not necessarily mean that they have a comparative advantage. I mean, it *maybe* does. But imagine a world where in either country it takes the exact same equipment, labor, and raw materials to make either beer or milk, and that there's free trade between the countries. It wouldn't matter which country produces which item, so long as between them they produced enough to satisfy the demand. Production does not equal advantage.