Comparative Advantage and Opportunity Cost

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. 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 because you are giving up your job to study harder.

The opportunity cost is the year of the job, and this is a trade-off in the hopes that future earnings are greater. The $25,000 that is forgone this year should translate into an additional $15,000 ($40-$25) each subsequent year. This is a reasonable opportunity cost, because the earnings made from that one year of work are lower than the expected increase in lifetime earnings -- quitting the job makes sense because the benefits are greater than the opportunity cost + the actual cost (i.e. tuition). b) It is beneficial to quit studies.

The cost of the studies is $5,000. The opportunity cost is $25,000 in lost income. The total cost is $30,000,.