The table below shows productivity of labour, i.e., outputs per worker. They represent the quantity of output per unit of labor that each country can produce in the two industries, Xand Y. Product Country A Country BGood X 8 6Good Y 4 2Determine which country has an absolute advantage in good X, absolute advantage in good Y and a comparative advantage in good X. Choose the correct answer from the options below. Country A, Country A, Country B Country B, Country A, Country ACountry A, Country B, Country B
Question
The table below shows productivity of labour, i.e., outputs per worker. They represent the quantity of output per unit of labor that each country can produce in the two industries, Xand Y. Product Country A Country BGood X 8 6Good Y 4 2Determine which country has an absolute advantage in good X, absolute advantage in good Y and a comparative advantage in good X. Choose the correct answer from the options below. Country A, Country A, Country B Country B, Country A, Country ACountry A, Country B, Country B
Solution
Country A has an absolute advantage in both goods X and Y because it can produce more of both goods per worker than Country B can.
Absolute advantage is determined by simply comparing the productivity of a worker in each country. In this case, a worker in Country A can produce 8 units of Good X and 4 units of Good Y, while a worker in Country B can only produce 6 units of Good X and 2 units of Good Y. Therefore, Country A has an absolute advantage in both goods.
Comparative advantage, on the other hand, is determined by comparing the opportunity cost of producing one good over the other in each country. The opportunity cost of producing Good X in Country A is 2 units of Good Y (since they could have produced 4 units of Good Y with the same resources), while in Country B it is 1/3 units of Good Y (since they could have produced 2 units of Good Y with the same resources). Since the opportunity cost is lower in Country B, Country B has a comparative advantage in Good X.
So, the correct answer is Country A, Country A, Country B.
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