Question

Assume UK and Russia produce both grapes and cloth.

Output in units	UK	Russia
Grapes	45	65
Cloth	100	45

1) By the theory of absolute advantage which country should specialize in Grapes? Which country should specialize in clothes? Critically comment on the applicability of the theory.

(1 mark)

2) Who has a comparative advantage in flowers? Who has a comparative advantage in cloth? Explain your answer by calculation of opportunity costs. (2 mark)

Answer 1

Absolute advantage means that country can produce more units of a good while comparative advantage means that country can produce goods with lower opportunity cost.

1) As UK can produce more of clothes than Russia, UK have absolute advantage in it.

On the other hand, Russia can produce more of Grapes than US, Russia owns absolute advantage in it.

2)

• Opportunity cost of UK of producing grapes is 2.22 grapes
• Opportunity cost of UK of producing clothes is 0.45 grapes
• Opportunity cost of Russia of producing grapes is 0.69 grapes
• Opportunity cost of Russia of producing clothes is 1.44 grapes

UK have lower opportunity cost than Russia in producing clothes, thus UK owns comparative advantage in producing clothes. On the other hand, Russia have lower opportunity cost in producing grapes, Russia owns comparative advantage in producing grapes.