1. What does absolute advantage mean? What does comparative advantage mean? Expl
ID: 1131659 • Letter: 1
Question
1. What does absolute advantage mean? What does comparative advantage mean? Explain which is the basis for trade, and why.
2.
6. You and your neighbor are the only people in a world that produces only cashews and mushrooms. You do not engage in trade with each other. On your own, you can each produce the following per day: You Neighbor Cashews Mushrooms Cashews 4 pounds Mushrooms 0 pounds Only gather cashews 12 pounds pounds Only gather mushrooms pounds 6 pounds 0pounds 4 pounds Right now you each split your time between gathering each product. You currently gather and consume eight pounds of cashews and two pounds of mushrooms, while your neighbor is gathering and consuming three pounds of cashews and one pound of mushrooms. Show (both graphically and numerically) how specialization and then trade with each other can make both of you better off. Who specializes in the production of each product?Explanation / Answer
1. Absolute advantage means the country which has less cost in producing a good, that country has absolute advantage. It takes into account only the financial aspect of trade.
Comparitive advantage means the country which has less opportunity cost in production in comparison with the other country ie. At a lower marginal cost.
The basis of trade is comparative advantage as it compares the opportunity cost of producing goods in both the countries. The coubtry with less opportunity cost will produce that good only and import the other good.
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