Comparative Advantage and Opportunity Cost Essay

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International Business

The first thing that can be concluded is that Spain has an absolute competitive advantage in both boats and trucks. Spain's comparative advantage in boats is 3:2 but its comparative advantage in trucks is 2:1. Therefore, Spain should produce trucks and Portugal should produce boats. This is because when a country has absolute advantage in two goods, then comparative advantage is in the good where it has the greater advantage. The other country has comparative advantage in the other good.

If the table illustrates what the productive capacity of the country is where these two goods are produced as a trade-off, then the following conditions exist:

Spain

Portugal

Total

Trucks

Boats

With the new plan, Spain doing trucks and Portugal doing boats, the outputs are as follows:

Spain

Portugal

Total

Trucks

Boats

The total economic output is greater. There are fewer boats -- hopefully these countries didn't need five boats because now they only have four -- but there are many more trucks. Extending the theory, these excess trucks can be traded for more boats (say, from France).

2. Italy has an absolute advantage in both wine and tables. Italy has comparative advantage in wine, with a 5:1. Italy's advantage in tables is just 2:1, which means that Greece has comparative advantage in tables.

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This is because when a country has absolute advantage in two goods, then comparative advantage is in the good where the absolute advantage is greater. The other country has comparative advantage in the other good.

Under the initial condition the following output occurs:

Italy

Greece

Total

Wine

Tables

Under trade, utilizing comparative advantage, the combined economic output of Italy and Greece is as follows:

Italy

Greece

Total

Wine

2000

0

2000

Tables

0

Thus, there are fewer tables, but a lot more wine. When you've had that much wine, maybe you don't need a table, or maybe you can sell the extra wine to another country to buy a table. They make tables in England, but are in need of wine.

3. a) The concept of opportunity cost reflects that for each resource used in a certain way, it would have been used in a different way. Ideally, one would use a resource in the way that delivers the greatest expected benefit. The benefit must be greater than its opportunity cost to make such a resource usage worthwhile.

In this example, opportunity cost occurs….....

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