Comparative Advantage (Time)

Comparative Advantage (time) ARSC 1432 Macroeconomics Co-Seminar SPRING 2009

1. France: 6W=4C

Divide both sides by 6:  1W=2/3C,  If France produces 1 bottle of wine, it has to give up two-thirds pound of cheese.

Italy: 2W=3C

Divide both sides by 2:  1W=3/2C  If Italy produces one bottle of wine, it gives up three-halves pounds of cheese.

In order to determine who has comparative advantage in what good, we have to think about who has a lower opportunity cost when producing one bottle of wine. Since France gives up 2/3 pounds of cheese and Portugal gives up 3/2 pounds of cheese, France gives up less, and so should produce Wine. Therefore, France has a comparative advantage in producing Wine and Italy has a comparative advantage in producing Cheese.

2. U.K.: 3B=4C

Divide both sides by 3:  1B=4/3C  If the U.K. produces one box of biscuits, it gives up four-thirds yards of cloth.

Portugal: 2B=2C

Divide both sides by 2:  1B=1C  If Portugal produces one box of biscuits, it gives up one yard of cloth.

So, who has a lower opportunity cost of producing one box of biscuits? The U.K. gives up 4/3 yards of cloth and Portugal gives up 1 yard of cloth. Portugal should produce Biscuits.

Therefore, Portugal has a comparative advantage in producing Biscuits and the U.K. has a comparative advantage in producing Cloth.